Wealth Bytes: Is Inflation Possibly Leading to a Rate Hike? The Fed Is Likely Not Done

Wealth Bytes: Is Inflation Possibly Leading to a Rate Hike? The Fed Is Likely Not Done

August 14, 2023

At the heart of every well-informed financial decision is a solid understanding of the current economic landscape. In our commitment to support your financial goals, we keep close tabs on economic updates and their potential impacts on your wealth management strategy.

Today, we’ll delve into some of the pressing issues that could shape our economy’s future: the resurgence of inflation and the potential for a rate hike from The Federal Reserve.

Perhaps the biggest news last week was the Consumer Price Index (CPI) release in which the headline number rose slightly to 3.18% year-over-year. Both Food and Energy saw increases in July, and Energy will likely increase in August’s reading given recent energy price increases in late July and early August (readings that were not included in the most recent CPI). The core CPI, which excludes food and energy, continued its decline, but still remains well above the Fed’s 2% target. However, the rate of decline slowed in July which would imply that, while the Fed has made headway in their fight against inflation, unless the rate of decline increases in August they will have incentive to raise rates again.

It should be noted that the Fed looks at the Personal Consumption Expenditures (PCE) index, which will be released later in August, but CPI is a statistic that many market participants watch closely as a precursor to the PCE.

CPI Subcomponents

When we look at some of the subcomponents of CPI, we see that Services (including Housing) have played a significant role in the headline and core inflation readings, with Goods showing declines in the last 12 months.

The Implication of PPI on CPI and Inflation

The Producer Price Index (PPI) increased slightly and the core PPI declined slightly, but the rate of decline moderated. Given this moderation in the decline of PPI, we expect that it will pass through into CPI at some level and again slow down the rate of decline for inflation.

Trade Data & Economic Activity

Finally, trade data was released last week, with both imports and exports showing annual declines. This is important because it is the total amount of trade (both imports and exports) that indicates economic activity and growth.

Waning Imports & Exports: Harbingers of a Possible Recession?

With both imports and exports declining, this area of weakness contributes to the likelihood of a recession and not a soft landing. Also, imports from China declined sharply, dropping China behind Mexico and Canada as our third-largest trading partner.

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