Thursday morning handed the financial markets the results for September’s annualized Consumer Price Index (CPI) growth that seemed to closely align with economists’ forecasts. At first glance then, the inflationary landscape may appear to be calm and steady-as-she-goes.
However, appearances can be deceiving, as a look under the hood reveals deep pain points within the U.S. economy that haven’t likely been priced into the equities market yet. There are implications for investors, but America’s workers are facing rising costs of essential goods and services, potentially weakening the supposedly strong consumer that’s propped up the economy throughout the year.
The headlines don’t tell the full story
Here’s the lowdown. September’s CPI increased 0.4% month over month, slightly ahead of economists’ prediction of 0.3%. Meanwhile, the September inflation rate rose 3.7% year over year, a result that just barely outpaced economists’ consensus call for 3.8%.
The CPI also rose 3.7% year over year in August, so it’s tempting to conclude that the September inflation print wasn’t anything to write home about. Yet, another data release from Thursday puts the apparently acceptable inflation rate in stark perspective.
Short-term stock traders might not pay much attention to this, but America’s retirees certainly do. On Thursday, Social Security beneficiaries learned that the cost-of-living adjustment (COLA) to their monthly checks will only amount to a 3.2% year-over-year increase in 2024. For an average Social Security beneficiary, this could amount to just an extra $59 per month.
To put that figure into context, 2023’s COLA was 8.7%. Granted, inflation was running red-hot when that COLA was calculated in 2022, so an outsized response was warranted, and no one expected the 2024 COLA to come in anywhere near 8.7%.
However, the 3.2% COLA for 2024 is substantially below the 3.7% inflation rate for September. Unless the government expects upcoming CPI readings to decline, it’s going to be another challenging year for American seniors who are just trying to make ends meet.
Some economists remain cheerful
Perhaps people on Wall Street see things differently than most folks on Main Street do. For one thing, economists focus on events that most regular people don’t, such as the chances of interest-rate hikes in 2023’s final FOMC meetings.
After catching wind of September’s nearly in-line CPI print, Wall Street’s oddsmakers are now penciling in a 90% probability that the Federal Reserve will keep the federal funds rate unchanged at the upcoming FOMC meeting in November. As for the December meeting, the likelihood of a quarter-percentage-point interest-rate hike has been set at 36%.
In other words, economists generally feel that investors don’t need to worry too much about interest-rate increases in the fourth quarter. For example, economists with Capital Economics expect a “more rapid decline in inflation and weaker economic growth to result in rates being cut much more aggressively next year than markets are pricing in.”
In a similar vein, Seema Shah, chief global strategist at Principal Asset Management, assured investors that there’s “nothing in the inflation report that should sway the Fed in one direction or the other.” Thus, Wall Street isn’t bracing for impact. However, Main Street’s predicament may reflect a different reality.
No escape from high shelter costs
Along with high gasoline prices, the headline inflation rate of 3.7% doesn’t convey the increasingly high expense that no one, rich or poor, can avoid: shelter. In September, housing costs increased 5.6% year over year, while rent costs shot up 7.4%. Even retreating to a hotel room didn’t solve the problem, as hotel-room costs jumped 7.3% year over year in September.
Gasoline costs increased 3%, but September didn’t fully reflect the damage done by recent events in the Middle East. Thus, working Americans will likely need to somehow prepare for a one-two punch of rapidly rising fuel and shelter costs in the fourth quarter.
Logically, this ought to have a negative impact on large-cap stock prices. However, the financial markets don’t always behave logically in the immediate term, so don’t assume that a correction is nigh. The question now is whether 2024 will be the year when problems on Main Street finally weigh on equities prices.
Unfortunately, it’s difficult to time these things. For now, keep an eye on the upcoming data releases and consider their implications for possible interest-rate increases and, more importantly, their effect on U.S. families who are just trying to make ends meet.
