The latest indicators of inflation are in, and they’re starting to look a little warm – bad news if you’re a bond investor. For March, the consumer and producer price indexes showed prices rising at their highest levels in years and well above the Federal Reserve’s 2% target.
The headline consumer price index jumped 2.6% on a year-on-year basis, the most since August 2018, and 0.6% since February, the biggest one-month jump since 2012. A good part of that rise was due to the steep rise in gasoline prices, so the so-called core CPI, which excludes food and energy prices, showed a more modest 1.6% YOY rise.
The producer price index, however, showed inflation running even hotter. Headline PPI jumped 4.2% YOY in March – its biggest spike in nearly 10 years – and a full 1.0% compared to the prior month. Excluding food and energy, the YOY increase was 3.1%, 0.6% on a monthly basis. Producer price increases often – but not always – turn into higher consumer prices, depending on whether or not manufacturers choose to, or are able to, pass along their higher costs to customers.
When the Federal Reserve first suggested a gradual tightening of its monetary policy in May 2013, investors began to wonder if the long-running bull market would come to an abrupt end.
A quick spike in interest rates at the time gave a sense that times were indeed changing. Yet investors end up shrugging off that noise: The SP 500 rose an impressive 22% between July 1 of last year and June 30 of this year. Toss in dividends and investors garnered a 25% total return -- roughly the amount investors should expect to garner over a three year period in normal times.
But these are not normal times. The stunning 191% gain for the SP 500 since bottoming out in March 2009 is remarkable in light of the fact that the subsequent economic rebound after the Great Recession has been quite tepid. Low interest rates, a huge amount of global liquidity and very high corporate profit margins all get credit for the bull market that has exceeded the wildest expectations of even the most aggressive market strategists.
At this point, it might seem the wisest path to sit back and enjoy the ride, waiting for another 20% gain over the next 12 months.
Yet before you grow too complacent, you need to take a closer look at factors driving the market higher and assess what kind of backdrop we should expect in the six months ahead. Here are key events and factors you should be tracking.
At this point, there are really only two points of economic interest: unemployment and inflation.
The former is falling and the latter may be rising. We now know that the U.S. economy created at least 200,000 jobs for the fifth straight month. That's the first time that has happened in more than a decade. The next payroll report comes on Aug. 8, and if that report also highlights a gain of at least 200,000 jobs, then it's hard to see how the Fed will stick by its "no rate hikes in the near future" policy. Continue reading "Here's Your Market Roadmap For The Rest Of 2014"→
This week we examine ways in which inflation nibbles away at your retirement income, especially in light of the President’s proposal for Chained CPI adjustments to Social Security. The formal title is Chain-weighted Consumer Price Index and it’s a variation of how the government figures out what is what we would call "inflation." Either way, with the low rates on offer from CDs and other "safe" investments, investors who don’t take action fall behind every year.