Inflation Didn't Peak This Spring. If Anything, It Broadened.

Inflation Didn't Peak This Spring. If Anything, It Broadened.
Stéphane Renevier, CFA

over 1 year ago2 mins

Inflation in the US didn’t peak this spring, as many had expected – if anything, it broadened. And that suggests it’s not going to be so easy for the US Federal Reserve (the Fed) to tame it.

This chart shows the breakdown of the latest inflation data from the US. It shows the headline consumer price index (CPI) rose nearly 8.6% (gray line) in May from the year earlier – a new 40-year record. And the core CPI (pink line) – which strips away the more volatile items like food and energy – rose at a still-hot level of 6%, only slightly less than the month before.

The trend wasn't encouraging for investors by any stretch. But the bigger worry comes from looking at the components that are driving inflation higher. See, the only component that didn’t see price gains was core goods (pink bars), which had been rising at record levels. And those prices are mostly easing now because retailers are sitting on growing inventories of stuff that consumers don’t want and are having to offer discounts. Meanwhile, the price of food (blue bars) and energy (green bars) both ticked higher, and so did the price of core services (gray bars) – a notoriously sticky component of inflation. This shows that rather than peaking, inflationary pressures have simply expanded.

This has two big implications for investors. One: broader and persistently higher inflation is likely to weigh on both corporate profits and consumer spending, the economy’s two bright spots. And, two: it raises the risk that the Fed will have to raise rates more assertively to tame inflation, which could push the economy into recession.

In this environment, when inflation is high and growth is low, you’re unlikely to find relief from stocks, bonds, commodities or even alternative assets. Your best bet, as we argued here, may be the almighty US dollar.

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