Monthly Market Commentary
An Update on Inflation
Philip Blancato, Chief Market Strategist, Advisor Group
It is nearly impossible to avoid the topic of inflation today – the subject permeates every conversation and news bulletin across financial media outlets and even crops up on mainstream networks by the hour. The Consumer Price Index (CPI), which measures what American consumers pay for a representative basket of goods and services, accelerated at a rate of 8.5% in March, the fastest annual rate since December of 1981.1 From a monthly perspective, the 1.2% increase since February marks the largest jump in fifteen years and was primarily driven by a significant spike in energy prices (up 11% in March on the back of an 18% rise in the price of gasoline)2 stemming from the Russia-Ukraine war. Beyond energy, the conflict between two of Europe’s largest grain producers who together account for nearly 30% of global wheat supply, lit a fuse that launched broader commodity prices higher. Wheat and corn futures increased 42% and 27% respectively this year through late March, while metals like nickel set record market highs that ultimately forced halts in trading.3
Prices for groceries also increased a noticeable 1.5% in March, 4 though that belies a much more extreme surge through the first quarter. Year-to-date food prices have increased at a 12.2% annualized rate. 5 Market participants scrubbing the mess of escalating inflation data for a nugget of good news can point to the easing month-over-month Core CPI rate. Core prices, which strip out the volatile components of food and energy, rose 0.3%, below the consensus expectation of +0.5% and at the slowest pace in six months, though they are still up 6.5% from a year earlier – notching the highest reading in the measure since August 1982.6
When thinking about how inflationary pressure can impact the US economy and potentially stock prices, we believe it is important to keep track of consumer spending. For example, lower income earners, whose budget allotments for fuel and groceries generally represent a larger portion of regular expenses, could be more adversely affected by current price trends. Wall Street expressed concern over this fact, however, the group has proved resilient in their spending, despite higher food and gas prices. Bank of America finds “the lower income cohort… continues to lead the higher income cohort in spending (excluding gas and grocery) by +12% as of early April.”7 Strong consumer spending is a good sign for the health of the underlying economy, as it represents more than 70% of GDP, and will be important to monitor as the Fed sets out to tame inflation.
Although some of these recent spikes in inflation readings can be traced back to the Russian invasion, the war has merely exacerbated significant, preexisting inflationary pressures, primarily incurred by excessively loose monetary and fiscal policy related to the pandemic and subsequent, on-going recovery. For example, currently, “the M2 measure of the money supply is up over 40% since Covid started [just over two years ago] and the Fed is nowhere close to being tight.”8 The “M2 Money Supply”, also referred to as “M2 Money Stock”, measures the amount of currency in circulation. M2 includes M1 (physical cash and checkable deposits) as well as “less liquid money” such as saving bank accounts.
Therefore, while we may soon see a trend lower, we still expect inflation to remain elevated in the months ahead. As a result, we continue to see equities as a key component of diversified portfolios. Equity returns can outpace the rate of inflation over time, particularly when prices are extremely elevated. Within equities, we prefer large-cap over small, as mature companies can be more defensive and potentially withstand higher input and labor costs better than smaller businesses.
CPI (headline and core): Consumer prices (CPI) are a measure of prices paid by consumers for a market basket of consumer goods and services. The yearly (or monthly) growth rates represent the inflation rate.
Index performance does not reflect the deduction of any fees and expenses, and if deducted, performance would be reduced. Indexes are unmanaged and investors are not able to invest directly into any index. Past performance cannot guarantee future results.
Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect again loss. In general, the bond market is volatile; bond prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixedincome security sold or redeemed prior to maturity may be subject to a substantial gain or loss. Vehicles that invest in lower-rated debt securities (commonly referred to as junk bonds or high-yield bonds) involve additional risks because of the lower credit quality of the securities in the portfolio. International investing involves special risks not present with U.S. investments due to factors such as increased volatility, currency fluctuation, and differences in auditing and other financial standards. These risks can be accentuated in emerging markets.
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1 Gwynn Guilford, U.S. Inflation Accelerated to 8.5% in March, Hitting Four-Decade High – WSJ, April 12, 2022.
2 Brian S. Wesbury, “March CPI,” First Trust, April 12, 2022.
3 Alistair MacDonald, War in Ukraine Is Already Taking Its Toll on Global Food Supplies – WSJ, March 20, 2022.
4 Guilford, U.S. Inflation Accelerated to 8.5% in March, Hitting Four-Decade High – WSJ, April 12, 2022.
5 Wesbury, “March CPI,” April 12, 2022. 6 Wesbury, “March CPI,” April 12, 2022.
7 Bank of America Securities, Investment Strategy Global Research Highlights, “April Showers bring… May Fed hikes?” April 11, 2022.
8 Wesbury, “March CPI,” April 12, 2022.