Making Sense of It: Inflation, Recession or Not

Inflation, Recession or Not

Inflation and fear of recession is in the news – constantly.

This has been a theme for this entire year. What is going on here, and what might be in store for us in the 4th quarter?

        The Federal Reserve is playing catch up and is raising rates at the fastest pace since the early 1980s. It will take 6 to 12 months to actually see the cooling effects of these rate hikes on the overall economy, so there is the very real possibility that the Fed will go too far or too fast and cause a deeper contraction than is needed or warranted.

        When we look at Headline inflation, which includes food and energy, we see a measure that is still over 8%. Core CPI, which excludes those volatile components of food and energy, is supposed to give us a smoothed out read on the overall increase in prices. That measure is also very high, over 6% by the latest measures. Seeing this stubbornly high September report, the Federal Reserve has stressed that they remain committed to its course of aggressively raising interest rates.

What about the components that go into the Consumer Price Index and those basic commodities that filter into CPI?

  • Commodities such as oil, wheat, and copper are showing some easing in prices. Gasoline at the pump has decreased from highs in the Spring.
  • Airline prices, lodging, and car and truck rental prices are all showing a small but encouraging decline.
  • Inventories held by major retailers increased this year. Retailers did not want to make the same mistake as last year and lack enough inventory for the holiday season. The result is that now they have excess inventories which they are selling at a discount before the 2022 holiday items arrive. Discounted prices result in bargains for us as consumers, but we need to be ready to hear about the negative effects on retail earnings this season.
  • Housing is trending down caused mainly by the almost doubling of mortgage rates from last year. This is the most glaring evidence of Fed’s tightening measures.

The labor market remains resilient despite dire warnings of recession.

There are still more than 1.7 million more job opening for every unemployed worker, or over 10 million job openings. People are quitting at a high rate, and they don’t generally quit a job unless they have been offered a better-paying job elsewhere. The Federal Reserve watches the “Quits Rate” as one of its preferred measures of the labor market. Assuming they are watching the labor market for signs of a slowing economy, they may not find it here – at least for now.

Consumer confidence has increased after three consecutive months of declines, and this is likely due to the decrease in gas prices. Because the consumer makes up 70% of the US economy, when they are feeling good and spending optimistically, it is hard to see a near-term recession.

We should remember that markets are forward-looking – they anticipate what’s coming. 

And this is true for both stock and bond markets. The steep corrections we have experienced in these markets this year may have largely priced in the economic slowdown the Fed is trying to engineer. Also remember that stock market corrections are common, but the S&P 500 Index has risen in thirty-five of the past forty-two years. Up is more common than down. For this cycle, as in most past cycles, when valuations come down to at or near average price relative to earnings – p/e’s – over a 15 or 20 year period, we should expect buyers to come back. We should see more up days than down days.

        And this market trend can and has occurred when the economy is “in recession.”


The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with or without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.

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