Stayflation
Running Point and its chief investment officer, Michael Ashley Schulman, CFA, were quoted by CNET in an article — by Dashia Milden and Peter Butler, “Inflation Hits Lowest Point Since Early 2021. What Experts Want You to Know” — regarding stubbornly high prices and slowly cooling inflation.
“We’re in a state of ‘stayflation,’ where inflation will remain in the 3% to 4% range unless there’s an official recession.”
Inflation is easing but not disappearing 💸
In June, inflation continued to moderate for the twelfth consecutive month. Despite a rise in gasoline costs and significant rent hikes, flat grocery prices helped offset the overall impact. Core inflation, which is closely monitored by the Federal Reserve, experienced a greater-than-expected easing.
According to the consumer price index reported by the Labor Department, there was a 0.2% increase in the consumer price index (CPI) in June following a 0.1% increase in May. In comparison to the same period last year, prices were up by 3%, marking the lowest level since March 2021 and a decline from the 4% seen in May.
Interest rate effects on CDs and mortgage rates🏡
The Fed will raise rates 0.25% (25 basis points) at the next FOMC meeting because they are “fed up” with inflation that still remains above their 2% target and the strong U.S. economy emboldens the Federal Reserve to tighten policy further.
Whether bank CD and saving rates move up slightly on the news will be more dependent on Powell’s statements about future raises beyond the July meeting since banks don’t want to lock themselves into long-term high interest rate liabilities if the Fed hints that it may pause rate hikes.
Because home ownership tends to be a long-term commitment, mortgage rates are connected at the hip to 10-year Treasury rate; last week, bonds sold off, pushing 10-year yields back above 4%. If the market believes the Fed will be able to tame inflation, raising short-term rates may inversely cause 10-year yields and mortgage rates to lessen.
Consumers should see inflation as definitely improving from where it was a year ago, but it is unlikely to reach 2% anytime soon. We maintain our “stayflation” call, that inflation will remain with us for a while, probably in the 3% to 4% range unless there is a major recession.
Quoted article excerpts:
The easing is greater than expected, according to Michael Ashley Schulman, chief investment officer at Running Point Capital Advisors. But that doesn’t mean inflation will reach the Fed’s 2% target anytime soon, Schulman added.
After reaching a peak rate of around 9% last summer, inflation has now dropped to 3%. Although that’s still high, Schulman believes we’re in a state of “stayflation,” where inflation will remain in the 3% to 4% range unless there’s an official recession.
But Schulman believes the Fed will raise its federal funds rate by 0.25% at the FOMC meeting. “Inflation that still remains above their 2% target and the strong US economy emboldens the Federal Reserve to tighten policy further,” he said.
There has been an expectation that [inflation] will go away quickly and painlessly; I don’t think it’s guaranteed that’s the base case. It will take some time.
Jerome Powell, Feb 7, 2023
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