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
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
Bureau of Labor Statistics website: bls.gov/cpi
 Wall Street Journal, ‘’Companies Plan Big Raises for Workers in 2022,’’ Dec. 7, 2021
 Federal Reserve Bank of Richmond, ‘’CFOs Report Rising Costs That Could Last Through 2022’’
 Federal Reserve Bank of Atlanta, atlantafed.org