Search
Close this search box.

Another High Inflation Reading Pressures Fed to Speed Up the Taper

Share:

No inflation relief in sight. And no relief for Federal Reserve Chairman Jay Powell who’s under pressure to quickly wrap up the tapering of bond buying and consider raising interest rates to battle a rising cost of living.

 

Year-on-year consumer inflation in November was 6.8% after a 6.2% reading in October, according to the Bureau of Labor Statistics. That’s the first back-to-back Consumer Price Index reading of more than 6% since the closing months of 1990. Inflation excluding food and energy – a better indicator of the underlying trend in the cost of living – remains elevated at 4.9% last month.

 

 

Rocketing Inflation Running Out of Steam?

 

Some recent signs indicate the run up in inflation is wobbling. The pace of monthly CPI increases appears to be leveling off. That suggests future increases in the cost of living could be less shocking than what we’ve experienced in the back-half of this year. Americans should also benefit from the recent plunge in oil prices, which could pull down the cost of gasoline, and from a rout in natural gas prices – which softens the potential hit from higher winter heating bills. Barring a rebound in energy prices, those drops should be reflected in the December CPI report. 

 

Still, that relief is likely too small to signal that the widespread inflation pain is over. Higher prices in November were seen across a broad range of goods. Inflation may remain uncomfortable for several more months, potentially pushing the Fed to raise rates in 2022.

 

More disconcerting for the Fed is the possibility that inflation expectations become ingrained in Americans’ minds. In Fed-speak, inflation expectations become ‘’unanchored.’’ That uncomfortable reality may be getting closer. Many companies are setting aside 3.9% of their payroll for pay raises for a broad swath of their workers, reports the Wall Street Journal. That comes as a recent survey of chief financial officers found that many firms expect cost increases to last for another 10 months.

 

Rate hike probabilities on Bloomberg show professional traders are predicting the Fed will raise rates by 25 basis points in June 2022, taking the Fed off the zero lower bound. 

 

How Does This Affect Goals-Based Investors?

 

What should goals-based investors do? First, we don’t see the need to rush out and make changes to your financial plan because Powell is closer to raising rates or because inflation is currently high. Inflation is inherently hard to predict as consumers and companies change their behavior – such as by substituting cheaper goods, deferring purchases, and driving efficiency – that can reduce the upward pressure on the cost of living. (See our 2022 Inflation Outlook story)

 

And a rate hike may be just what the economy needs to cool the inflation pressures. As discussion of a rate hike intensifies and Powell pivots on inflation, Wall Street is keeping 10-year Treasury note yields roughly stable – in other words, the market is indicating that short-term rate changes will lead to long-term relief.

 

In addition, we doubt the equity market will be derailed by the prospect of a moderate amount of interest rate hikes. Strong GDP growth (FYI, the Atlanta Fed GDPNow Forecast for the fourth quarter is currently at 8.7%) and continued growth in corporate earnings have the potential to sustain equities.  

 

And for income-seeking investors, based on what we currently know, we believe the potential rate hikes in the months ahead are unlikely to be large enough to alter the fact that bond yields are at historic lows and fixed-income payouts are generally negative on an inflation-adjusted basis. So there’s no change In our view that an investor may want to consider replacing core bonds with higher yielding instruments to fund retirement and other financial goals. 

 

Read the 2022 Outlook: The Next Unprecedented Year for our views

on the economy, inflation, and China

 

Further reading:

Inflation Sticker Shock Is Spreading to More Everyday Goods

Booming U.S. Economy Snuffs Out Fed’s ‘Transitory’ Inflation View

Did We Just Reach Peak Inflation Pain?

If Inflation Returns, Bond’s Diversification Power May Disappear

Essentially Nothing. That’s How Much Bonds May Return Over Next Five Years


[1]Bureau of Labor Statistics website: bls.gov/cpi

[2] Wall Street Journal, ‘’Companies Plan Big Raises for Workers in 2022,’’ Dec. 7, 2021

[3] Federal Reserve Bank of Richmond, ‘’CFOs Report Rising Costs That Could Last Through 2022’’

[4] Federal Reserve Bank of Atlanta, atlantafed.org

This commentary is written by Horizon Investments’ asset management team. For additional commentary and media interviews, contact Chief Investment Officer Scott Ladner at 704-919-3602 or sladner@horizoninvestments.com.

Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This report does not attempt to examine all the facts and circumstances that may be relevant to any company, industry or security mentioned herein. We are not soliciting any action based on this document. It is for the general information of clients of Horizon Investments, LLC (“Horizon”). This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this document, clients should consider whether the security in question is suitable for their particular circumstances and, if necessary, seek professional advice. Investors may realize losses on any investments. Index information is intended to be indicative of broad market conditions. The performance of an unmanaged index is not indicative of the performance of any particular investment. It is not possible to invest directly in an index.

 

Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. This commentary is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed herein are our opinions as of the date of this document. These opinions may not be reflected in all of our strategies. We do not intend to and will not endeavor to update the information discussed in this document. No part of this document may be (i) copied, photocopied, or duplicated in any form by any means or (ii) redistributed without Horizon’s prior written consent.

 

Other disclosure information is available at www.horizoninvestments.com.

 

Horizon Investments and the Horizon H are registered trademarks of Horizon Investments, LLC

 

©2021 Horizon Investments LLC




You are now leaving this website to go to HorizonMutualFunds.com