Inflation Commentary (August, 2022)

The Consumer Price Index (CPI) climbed to a historically high 9% over the past twelve months prompting concerns for ongoing inflation. There is much discussion in the popular press as to the causes and to the extent it is “transitory” or is becoming embedded in economic activity. While the emergence of inflation contributes to market volatility, given the responses to the pandemic which include massive government stimulus payments, supply chain disruptions and an accommodative monetary policy coupled with a boycott of Russian oil due to its invasion of Ukraine it is not surprising that we are seeing significant price increases, which are having a negative effect on many people’s personal spending decisions.

The longer-term worry is that inflation gets baked into a cycle of wage and price increases, which can be not only difficult to deal with, but painful to break. In the meantime, the Fed has been increasing interest rates. Our usual models often tell us that rising interest rates will have a negative impact on growth. Currently the employment numbers remain positive. Regardless, this expected conflict between inflation and growth, plus the difficulty with measuring economic activity is a source of uncertainty in today’s markets. While July’s results were pleasant, expect continued market volatility.