How to Think About Inflation

There are a bunch of indexes to track inflation—and they show varying figures for current inflation. Mitch helps investors sort it all out. [Mitch on the Markets] How Investors Should Think About Inflation There’s a new inflation story every day, but that doesn’t mean investors are any closer to making sense of it all. For one, the varying measures of inflation – and all of the categories and sub-categories that go along with it – are nothing short of head-spinning. Most readers have heard of the commonly cited Consumer Price Index (CPI), but that’s not even the measure of inflation the Federal Reserve uses when making policy decisions. The Fed focuses on the Personal Consumption Expenditures (PCE) price index, and these days the central bank also seems to prefer stripping out food, energy, goods, and shelter (housing).1 All told, the Atlanta Federal Reserve tracks nine inflation indices that all use slightly different methodologies to measure “underlying” inflation. As you can see below, the results often vary widely, painting significantly different inflation pictures depending on which metric is being used: --------------------------------------------------------------- [What Steps Can You Take When Inflation is Worrying You?]( In a very volatile market, concerns about rising inflation will always be an unsettling topic when it comes to making financial decisions. The pressures of the media may cause you to make these decisions immediately, and often, without fully doing your research. To help you focus on key forecasts and data that can help navigate the turbulence of inflation, I recommend reading our just-released February 2023 Stock Market Outlook report. This report will provide you with insights to consider such as: - Setting U.S. return expectations for 2023 - Zacks forecasts at a glance - What produces 2023 optimism? - What’s alive for 2023 pessimists? - Is it time to buy stocks? - And more… If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! [IT'S FREE. Download the Just-Released February 2023 Stock Market Outlook 2]( --------------------------------------------------------------- Measure of Underlying Inflation 12-Month Growth Rate (December 2022) Core CPI 5.7% FRB Cleveland Median CPI 6.9% FRB Cleveland 16% Trimmed-Mean CPI 6.5% Atlanta Fed Sticky CPI 6.7% Core PCE 4.7% Market-Based Core PCE 4.9% FRB Dallas Trimmed-Mean PCE 4.6% FRB San Francisco Cyclical Core PCE Inflation 7.5% Cyclically Sensitive Inflation (Stock and Watson (2019) 6.7% Source: Federal Reserve Bank of Atlanta 3 In any given year, as an investor determines their outlook for inflation, interest rates, and corporate earnings, using CPI and Core CPI is likely satisfactory for the inflation piece of the analysis. But I’m not sure that works for 2023. This year, I think investors should focus on what the Federal Reserve is focused on. Minutes from the December Fed meeting – in addition to numerous comments and press conferences from Chairman Jerome Powell – say the focus should be core services inflation excluding housing. In other words, while analysts and experts are breaking down changes to the prices of eggs, gas, and refrigerators each month, investors can likely look past these commentaries and data points. At this stage, “goods inflation” is not bearing nearly as much weight on the Fed’s thinking as many investors and market watchers may think. Last month, for instance, CPI fell to 6.5% in December from 7.1% in November and a peak of 9.1% in June, and overall consumer prices also fell -0.1% in December from November – the first monthly drop since May 2020. The Fed was largely unmoved. That’s because core services inflation (blue line on the chart below) remains elevated even as broad-based measures of inflation are in a downward trend. Services Inflation Excluding Housing (Blue Line) Remains Elevated Source: Federal Reserve Bank of St. Louis 4 Services inflation is driven in large part by a tight labor market’s effect on wages. That means investors’ approach to inflation this year should involve monitoring average hourly wage data, as well as keeping an eye on the Bureau of Labor Statistic’s employment cost index release. These are the inflation metrics the Fed is watching most closely to determine the path of interest rates, so it makes sense that investors should be honing-in on this aspect of inflation, too. Bottom Line for Investors December 2022 wage data was encouraging. Year-over-year, wages rose by 4.6%, a marked improvement from a 5.6% peak in March but still not compatible with the overarching goal of 2% core inflation. Looking at just Q4 2022, wages grew at a 4.1% annual rate, which may be confirmation that a softening trend is firmly underway. Later in January, the Labor Department will release its quarterly employment-cost index, which is not likely to receive much press but that investors should keep a close eye on. The Fed sees this index as the most reliable gauge of worker pay, so it is likely to factor heavily into their plans for interest rate policy. Better data on wages could offer a clearer understanding of where interest rates will peak, which many would argue is what the stock market needs for a sustained rally. To better protect your investments from inflation, I am offering all readers our [Just-Released February 2023 Stock Market Outlook Report](. This report will provide you with key forecasts along with additional factors to consider, such as: - Setting U.S. return expectations for 2023 - Zacks forecasts at a glance - What produces 2023 optimism? - What’s alive for 2023 pessimists? - Is it time to buy stocks? - And more… If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! [Download the Just-Released February 2023 Stock Market Outlook 5]( About Zacks Investment Management Zacks Investment Management was born out of one of the country’s largest providers of independent research, Zacks Investment Research. Our independent research capabilities from our parent company truly distinguish us from other wealth management firms - our strategies are derived from research and innovation, including the proprietary Zacks Rank stock selection model, earnings surprise and estimate revision factors. At Zacks Investment Management, we work with clients with $500,000 or more to invest, and we use this independent research, 35+ years of investment management experience, and tools we’ve developed to design customized investment portfolios based on each client’s individual needs. The end result is investment management that is research driven, results oriented and client focused. [Let's Set Up a Talk]( Don't put off planning your secure, happy retirement! Get started today by talking to a Zacks Wealth Advisor. [facebook] [linkedin] [twitter] © Zacks Investment Management | [Privacy Policy]( 1[Wall Street Journal. January 11, 2023.]( 2 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion. 3[Federal Reserve of Atlanta. 2023.]( 4[Fred Economic Data. 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