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Core Inflation Hits 40-Year Record

Core Inflation Hits 40-Year Record

October 14, 2022414 view(s)

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. 


PPI


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%. 


CPI


The CPI is the price consumers pay or the average of all inflation. CPI can also be called headline inflation and is the number most often discussed by the media. CPI measures the price changes in a basket of goods over time. CPI is felt differently by everyone. Some people may have more healthcare expenses, whereas others may have more energy needs or food away from home. Everyone spends their money differently. The CPI is an educated guess of what most people are paying above one year ago. The government has changed how it measures CPI.

Core Inflation Hits 40-Year Record

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


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.


Interest Rates


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.


Core Inflation Hits 40-Year Record

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.


Core Inflation Hits 40-Year Record

Core Inflation Hits 40-Year Record

What Does it Mean?


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?

You don't have to be a victim of the Fed. You can take control of your retirement account today with a precious metals IRA. Only a small percentage of people know that the government allows penalty-free and tax-free rollovers into precious metals IRAs. Financial advisors won’t tell you about it because they can’t sell it to you. Most financial advisors are trustworthy but can only sell you paper promises. The U.S. Gold Bureau has a team of dedicated professionals to help you protect your retirement account with physical precious metals. They will coach you in setting up your account correctly and legally.

If the most important thing is making sure your money is there when you need it, doesn't it make sense to hold your money in assets with intrinsic value? Assets with intrinsic value can't go to zero. Do you want gold or worthless paper waiting for you in retirement?

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

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About the Author: Ryan Watkins

 

Ryan is proud to be an Army veteran. After honorably serving his country, he studied finance, marketing, and kinesiology and graduated Cum Laude. Sharing a professional, practical, well-rounded investment perspective is his primary objective. Ryan invests in many different assets but admits he likes tangible assets best. His sincere passion is educating people and helping them make the most informed choices.

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Ryan Watkins, Op-Ed ContributorbyRyan Watkins, Op-Ed Contributor
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