Inflation has been front-and-center of investors’ purview for months now. Prices have risen at a historically elevated rate with year-over-year CPI (consumer price index) recently peaking (possibly) at just over 9% in June. And it’s not just here in the US; inflation in the Eurozone hit 8.8% in July and remains on an upward trend. Nearly all central banks are on a path of raising rates to fulfill price stability. Inflation readings may certainly recede throughout 2022 and into 2023, however, there remain structural dynamics within the economy that could cause above-average inflation to persist. The housing market, labor market, and domestic production demand situations could keep prices rising above their long-term average.
The labor market remains very tight. Job openings are still near historical highs, labor force participation has yet to recover, and workers are quitting jobs in search of other opportunities and higher wages in what is being called “The Great Resignation.” These dynamics create upward pressure on wages, and businesses are passing on elevated employee costs to consumers in the form of higher prices.
Supply chains are moving home. The global shutdown exposed the risk of sourcing products from overseas as crucial inputs, such as semiconductors, became and still are difficult to obtain. As a result, companies are looking to source products domestically, which is inherently more expensive. These higher costs are likely to contribute to higher prices, especially when you consider the difficulty of finding workers.
Additionally, the housing market has a dearth of supply relative to buyers. Higher mortgage rates have recently tapered purchasing activity and will slow rapid price increases in the near term. Long-term, both home prices and rent prices could see above-average growth as buyers outweigh supply. Housing costs exert a sizeable influence on CPI readings. Rent and owners’ equivalent rent represent almost a third of the CPI, one of the largest components of the index.
Officials, pundits, and analysts have informally combined to form a consensus that inflation will recede by year-end. In a relative sense, this may be true. Though our expectations should not be anchored around previous sub-3% rates. 9% year-over-year price increases may be a thing of the past, but do not be surprised to see CPI readings in the 4-6% range for an extended period.
If inflation remains elevated the Fed will be forced to keep rates higher for longer. This will certainly impede economic activity. In this scenario, the path to economic growth may be longer than many expect. Do not let recency bias creep in, we do not expect a rapid recovery as we saw in the wake of the pandemic.
At BerganKDV we assist clients in developing diverse financial planning strategies and provide meaningful advisory to help find opportunities when the market is volatile. If you have additional questions regarding inflation and how it may impact your financial planning, we would be happy to discuss this further. Contact us today to learn more about our Wealth Management solutions and what our advisors can do for your financial planning needs.
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