With Inflation (Still) Running Red-Hot, The Fed Is Back In Focus…
I bet you didn’t need the Bureau of Labor Statistics (BLS) to tell you that inflation was still red-hot.
But the market did (and possibly the Fed, too?)
On Tuesday, the BLS reported that the consumer price index (CPI) rose more than expected in August.
The tale of the tape: prices increased 8.3% in August compared with last year and rose 0.1% over the previous month. Experts were looking for a rise of 8.1% compared with last year and a sequential fall of 0.1% over last month.
This came despite gas prices falling for 91 straight days. The average price of a gallon of gas peaked at $5.02 in June, falling to about $3.70 by the day of the report’s release.
Instead, the main culprits for the increase were shelter, food, and medical care.
Core CPI, which strips out food and energy prices, also outpaced expectations, rising 6.3% over last year and 0.6% over the previous month. Expectations were calling for 6.1% and 0.3%, respectively.
Fed In Focus
This troubling report shows the serious nature of the problem. And the markets responded on Tuesday. The Dow Jones Industrial Average fell by 2.6%, the S&P 500 by 3%, and the Nasdaq by about 4%.
As evidenced by his recent Jackson Hole speech, Fed Chair Jerome Powell and the rest of the Federal Reserve are starting to get the message. He said raising interest rates would bring “some pain” to Americans, but the alternative (not subduing inflation) would be even worse.
And to show you that this shouldn’t be a partisan issue, consider this piece in Bloomberg. It cites a series of tweets from Larry Summers, former Treasury Secretary under President Obama and the President Emeritus of Harvard University:
“Today’s CPI report confirms that the US has a serious inflation problem.
Core inflation is higher this month than for the quarter, higher this quarter than last quarter, higher this half of the year than the previous one, and higher last year than the previous one.”
He also said that the target benchmark rate will likely need to be raised to close to 4% (the target rate is 2.25%-2.5%). And it “seems to me to be better to move rapidly than slowly.”
Remember, it’s part of Powell’s mandate to get inflation down to 2%. And that’s not likely to happen soon unless drastic (and painful) measures are taken. I’ll leave you with this gem from Summers:
“It is highly implausible that inflation will fall to 2 percent without unemployment exceeding 4.5 percent. Yet this is the most pessimistic view among 19 members of the FOMC. Dangerous group think.”
Add it all up, and you can count on a third consecutive interest rate hike when the Fed meets on September 20-21st. Futures markets are pricing in a 76% probability of a 75-basis-point hike and a 24% probability of a 100-basis-point hike!
Action To Take
If we do get a 100-basis-point hike, expect it to send shockwaves through the markets. We’ll look for more clues as the days get closer to the meeting. Here lately, we’ll usually see a trial balloon in the form of “insider sources” speaking to the Wall Street Journal.
We plan to touch on the ramifications of this on the housing market in these pages soon. (The average 30-year mortgage rate topped 6% for the first time since 2008 in anticipation of more rate hikes.) But in the meantime, if you’re looking for ways to combat inflation and put your portfolio on the right track, then you need to see my colleague Nathan Slaughter’s latest report…
Nathan has put together a report for readers who want to “keep it simple”. You’ll find five safe, high-yield stocks that you can own for the long-term — picks that are so solid, he considers each one of them to be “bulletproof”. In fact, they’ve weathered every dip and crash over the last 20 years and still handed out massive gains.
With these picks in your portfolio… you may never have to worry about what the market is doing again. Go here to check it out now.