5 Insights on Inflation: Is Inflation Going Down?

Jun 18, 2024

Inflation has been a leading topic among investors since 2021, but recent data is starting to demonstrate the effects of the Fed’s interest rate policies. Does this mean inflation is going down?  

Here are five key insights on inflation for investors to know:  

1. The Consumer Price Index and Producer Price Index are showcasing a positive trend for inflation.

Last week, the Consumer Price Index and Producer Price Index, two key inflationary measures, showcased positive trends, as the CPI came in lower than expected and the PPI exhibited disinflationary pressures.  

As producers pay less for goods and services, consumers will presumably feel the benefit of those lower prices down the road.  

Ultimately, this is positive for the market and may mean the Fed can eventually introduce lower interest rates.  

2. Inflation does not affect everyone the same.

As previously discussed, inflation does not affect everyone the same. A significant contributor to current inflation is shelter costs, specifically rental prices.  

However, most Americans own their homes (about 67-68%), and over 90% of those homeowners are locked into fixed interest rates from before the Federal Reserve’s tightening cycle.  

Although shelter costs have spiked inflation, it’s important to remember that the impact is not widespread.  

3. Interest rate cuts are a moving target.

If inflation is trending in the right direction, what can we expect for interest rate cuts?  

At the start of the year, the market anticipated six to seven rate cuts. Now, however, the market only anticipates two, and the Federal Reserve forecasts just one.  

Ultimately, we can expect that interest rates will stay higher for longer.  

The Federal Reserve is data dependent, and indicators must play out well for a rate cut to become a reality.  

4. There is risk in the fixed-income market.

Currently, with updated data, the interest rate market is experiencing volatility. (Last week alone, yields fell 20 basis points on the 10-year Treasury note.) 

We believe this introduces risk in fixed-income markets.  

Volatility is normal and, with the proper allocations and long-term perspective, can be navigated well.  

5. The S&P 500 still has concentrated returns, but small and mid-caps are starting to perform.

Year to date, large caps are outperforming small and mid-caps, but recently, small and mid-caps have started to perform better. 

At Credent, we diversify across all market caps. If we see performance continue in mid and small caps, our portfolios stand to benefit.  

Right now, those small and mid-cap companies are still notably underperforming the likes of the S&P 500. The S&P 500 has heavily concentrated returns, and year to date, the top 10 names in the index make up about 75-80% of the return profile.  

Despite this concentration, the events of the past couple of weeks indicate that diversification may be a benefit as we head into the end of the year.  

If you’d like to talk to an advisor about navigating inflation, reach out using the form below. 

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