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Inflation Continues to Challenge the Markets Thumbnail

Inflation Continues to Challenge the Markets

Stocks had a rough day yesterday.  The S&P 500, Dow and NASDAQ all had their worst single trading session since June 2020.  The culprit was the latest Consumer Price Index (CPI) report that showed prices climbed 8.3% in August compared to a year earlier:

Chart: U.S. Inflation Remains Persistent

As you can see in the chart above, the 8.3% reading was actually down from June's 9.1% and July's 8.5%. The problem was that investors were expecting inflation to come in even lower. A lower inflation rate may have encouraged the Fed to moderate its march toward higher short-term rates at its policy meeting next week.  Now with evidence that inflation remains elevated, expectations for a slowdown in rate hikes have been dashed.  When investor expectations are dashed, markets gyrate in the short-term and we get days like yesterday. 

Jerome Powell has made it clear that the Fed's top priority is to bring inflation under control and will "keep at it until the job is done", as he explained in a recent speech from Jackson, WY. His view is that runaway inflation has the potential to be more damaging to the economy than higher interest rates, even though he recognizes higher rates "will bring some pain to households and businesses."  

The biggest fear remains that the Fed will raise short-term rates too high and tip the U.S. economy into recession.  The markets are currently pricing in this possibility.  While it is likely the U.S. economy is already in a recession, the economic data (at least so far) indicates that it has the potential to be a relatively shallow one. 

While the investment environment remains uncomfortable, we know that the best course of action is to remain steadfast in our investment approach, make adjustments as necessary, and push through to better days.  


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