Inflation: Still Hot, Still Broad
The latest inflation data put a dent in the idea that price pressure could deteriorate faster than the labor market. The June CPI report showed that prices rose 9.1% relative to last year and 1.3% relative to the previous month. Both were well above Wall Street consensus estimates and will likely ensure that the Federal Reserve raises rates aggressively at their next meeting at the end of the month.
The fact that the Fed (and other global central banks) could still accelerate the pace of rate hikes increases the chance that the labor market will crack under the pressure.
Food and energy prices drove an outsized share of the increases, but the breadth of price increases across categories does not offer evidence of relief elsewhere. Important categories including rent and health care services accelerated between May and June, and durable goods categories such as motor vehicles and furniture remained elevated. The Fed is solely focused on bending inflation back to target, and this showed that it’s still far from that goal.
Food nd energy prices drove an outsized share of the increases across categories does not offer evidence of relief elsewhere.
The bond market reaction fits with what you would probably expect. Fed funds futures now imply that a 100 basis point hike at the next meeting is on the table. Markets are now suggesting that short rates will decline by roughly 80 basis points in 2023. The market thinks this year’s aggressive tightening will abruptly become easing next year.
This latest data point makes us incrementally more pessimistic about the near-term economic outlook. But we should also note that risk assets are already well on their way to pricing in this more negative news. While we are probably not at the bottom yet, pockets of opportunity are starting to emerge.
It is important for investors to maintain a longer-run mindset. While the outlook may seem bleak now, most tend to be overly pessimistic about the future of stocks no matter what. Blind optimism can hurt portfolio performance in the short term, but allowing pessimism to derail your long-term plan can be even more detrimental to reaching your goals.
Rick Barragan is the Managing Director, Los Angeles Market Manager, for J.P. Morgan Private Bank.
[email protected] | (310) 860-3658
privatebank.jpmorgan.com/los-angeles
