Inflation Progress Stalling Out?

Below is a transcript of this week’s video.

Hi, this is Jason Pride, Chief of Investment Strategy and Research at Glenmede.

The latest Consumer Price Index (CPI) release, which revealed hotter-than-expected figures of 0.4% and 0.3% month-over-month gains for headline and core CPI, sent ripples through the financial markets last week. The S&P 500 initially fell sharply in reaction as investors reassessed the timing of the Fed’s anticipated interest rate cuts. Bond yields also initially rose sharply, with the 2-year Treasury yield experienced its largest one-day jump in nine months.

The report seemed to confirm recent suspicion that improvements in inflation were stalling out and becoming more difficult to obtain. Looking at year-over-year inflation – Headline or Core – both still remain notably above the Fed’s 2% target and appear to declining more slowly.

The stalling out of inflation improvement was underlined by the disparity in outcomes in CPI components; while goods experienced outright deflation, services prices remained sticky. Declines in the prices of gasoline, used cars & trucks and apparel were offset by notable increases in shelter costs, car insurance and medical care prices. However, perhaps more important was the increase in services excluding shelter, a measure that the Fed has referenced before and that appears to reflect a persistent rise in key costs, including wages.

Sustained inflationary pressures, especially in services and shelter, will likely prompt the Fed to take a more cautious approach to rate adjustments this year. The bond market finished the week at higher yields, appearing to push back the anticipated timeline for rate cuts and build in higher-for-longer expectations. As a result of the higher yields, fixed income investors should now be set up for more generous returns ahead. However, equity markets reacted differently, seemingly brushing aside the impact of higher rates on either valuations or the economy, and ending the week on a higher note.

So to summarize, Inflation has made considerable progress since its mid-2022 highs, but that momentum appears to have stalled above the Fed’s 2% target. There has been outright deflation in goods prices, but sticky services prices have been the primary culprit behind persistent inflation. Following the recent CPI report, markets are now expecting a less aggressive path for Fed rate cuts this year. Bond yields already reflect this higher-for-longer scenario, setting up fixed income investors for potentially more generous returns ahead. Aside from a brief pullback, equity markets have not fully reflected the impact of higher rates on valuations or the economy.

Thanks for listening! And please don’t hesitate to reach out with any questions.