What is the real inflation rate anyway and can we all calm down a bit!?




The Federal Reserve once again spooked markets as August CPI data showed an increase (not a decrease, as expected) of 0.1%. Not a whole lot of extra inflation in my opinion but enough to send the Fed into a fritz as they may raise rates another .75-1% next week. August CPI is old news. But, is there a way to determine for ourselves what the future of inflation looks like so we can make better investment decisions?


The Fed raised rates from 0-2.25% in the last 9 months which have sent 20yr Treasury bonds (ie “TLT”) to lows not seen since 2014. Stocks (S&P 500, “SPY”) is down about 18% year to date and seems to be moving around here indecisively. Commodities, marginally held up with natural gas futures leading the way at over 111% year to date; more likely as a result of the Russian war’s cut to supply than anything else.


As investors, the goal is to get a clear picture of Fed action going forward. This is almost impossible to do as the Fed is made up of infallible human beings who have historically been radically inaccurate.


There are downside pressures to consider. Higher inflation due to increasing demand is notably real. A rapid recovery after two years of Covid lockdown along with Russian energy supply cuts, have sent an almost perfect storm for higher inflation. However, we live in the 21st century. A time when trade and technology should make things cheaper and easier. Assuming governments do their jobs and alleviate trade restrictions, support transportation infrastructure, and manufacturing, global markets should resume their annual $168 trillion exchange without issue. Evidence that shows a more reasonable inflation rate, and that it’s really not that bad, is considering the following: 1. Energy to Europe becoming more sustainable with US/Middle East help, 2. Global shipping resumes at full capacity, which appears to be almost the case^1, 3. Corporations begin to lay off employees, thus cooling down the labor force, as Goldman Sachs soon plans to do^2 or, immigration improves so that more people can participate in the EU and US labor market.


The biggest risks for investors are not from inflation but from a mistake by the Fed. Should the Fed overreact to incorrect data (because who can see the future anyway?), markets should face even a more difficult course. However, there’s plenty of data to show a global turnaround is in reach. Technology is getting better and has a natural disinflation effect. Companies continue to merge, which may force a labor market reduction soon enough.


Staying invested is clearly the way to go as history has always shown that it works out in the end. Having said that, if you are nervous about committing new money, consider the Betterment Cash Reserve, which now pays a 2% interest rate and is FDIC insured up to $1m.^3


At Eureka Wealth Management, I help clients make investment decisions that are in line with their risk appetite and time horizon. I also provide retirement advice, tax/estate strategies, and more. Call for a free, initial consultation at (760) 537-0791 or book online at eurekawealthmanagement.com.


Sources


^1: “Global supply chains poised for relief as ship congestion eases” link

^2. “Goldman Sachs to kick off Wall Street layoff season with hundreds of job cuts this month” link

^3: Betterment Cash Reserve link