Core Inflation Hits 40-Year Record

The U.S. Bureau of Labor Statistics released the September inflation numbers. The PPI (Producer Price Index) was 8.5%. CPI (Consumer Price Index)  came in higher than expected at 8.2%. Core inflation (CPI minus food and energy) came in at 6.6%, the highest number since August 1982. Learn about the different types of inflation. All numbers were higher than expected. The surprising numbers almost guarantee another hefty interest rate hike at the November 2 FOMC (Federal Open Market Committee) meeting of the Federal Reserve. 

The PPI is the price producers pay. The PPI is a trustworthy indicator of future CPI numbers because businesses will pass price increases to consumers. When the PPI is higher than the CPI, it is safe to say inflation has yet to peak. The current PPI is 8.5%, and the current CPI is 8.2%. 

The good people at www.Shadowstats.com have kept records of the methodology changes and created a graphic showing the CPI number if the government measured the same as in 1980. If the government measured inflation the way it measured it in 1980, inflation would be more than double its current number.

Core inflation is how policymakers make decisions. Core inflation is also based on a basket of goods but removes the most volatile commodities like food and energy. Policymakers don’t want to change interest rates every time the price of oil changes or food commodities like orange juice change price. The FED and Treasury have been saying the CPI has been high but would defend their actions by saying core inflation was dropping.. This narrative will need to change now that core inflation has been the highest since 1982.

Two FOMC meetings are remaining this year, November 2-3 and December 14-15. November 2, the FOMC will discuss the economy and announce the interest rates. The Fed has already raised interest rates five times in 2022. In his Jackson Hole speech, Chairman Powell stated that the Fed would not make the mistakes of history by failing to be aggressive enough in fighting inflation.

Chairman Powell talked about Chairman Volker’s failures in the 1970s before his success in the 1980s, raising interest rates to around 20%. Before the higher-than-expected inflation numbers, market experts had interest rates between 4-4.25 before the end of 2022. Powell may use the higher numbers to accelerate the rate hikes to 4.25-4.5% this year. The higher inflation numbers likely mean the following two rate  hikes will be 75 basis points each.

Raising interest rates is very bad for market returns. Rates have risen about 3% this year. In 2022, the Nasdaq is down -32.05%. The S&P500 is down -24.95% and bonds are down -18.88% . Since the first rate increase in March, the Nasdaq is down -21.7%. The S&P500 is down -18.9%, and bonds are down -13.2%. Most people rely primarily on stocks and bonds to fund retirement. A hypothetical 60/40 retirement portfolio is already down about -24.95% this year. Since the average retirement is around 20 years, most people have already lost about five years’ worth of savings this year. If the Fed raises rates 75 bps each time, we could see an additional and substantial drop in equities and bonds before the end of the year. The following is not a prediction but an example of what it could look like if the market reaction is like previous rate hikes this year. If the Fed raises another 150 bps this year and the market follows the pattern, the Nasdaq could drop another -10.5%. The S&P500 could drop another -9.45%, and bonds could drop another 6.6% before December 31. Can your retirement account handle another 10% reduction this year?

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It's your money. What do you want to do? Waiting days could cost you years. 

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