Inflation Update for Investors
Inflation, as measured by the Consumer Price Index, rose a scant 0.1% in May on a seasonally adjusted basis, and the Federal Reserve may be done with raising interest rates, while economic growth is stronger than expected. The list of bullish fundamentals is much longer than the list of bearish signals, and a turning point in the outlook could be taking hold.
After increasing 0.4% in April, the U.S. Bureau of Labor Statistics reported on Tuesday, June 13, 2023, the fractional level of inflation in May confirmed the Fed had wrung inflation psychology from the mass financial psyche.
In addition to May’s fractional inflation increase, the 12-month rate of inflation through May also showed progress. The inflation rate in the 12 months through May was 4% before seasonal adjustment. That’s five percentage points lower than the peak 12-month CPI rate of 9.1% reached in June 2022.
The other very good news this past month came on Wednesday, June 14, when the Federal Reserve concluded its meeting by not raising lending rates for the eleventh time since March 2022. In one of the boldest monetary tightening campaigns by the U.S. central bank in its 110-year history, the Fed raised its benchmark lending rate by 1000% in the past 15 months to beat down the worst inflation flareup in over four decades. The Fed said further rate hikes may be necessary, but it could be posturing. With inflation in May of .1%, the Fed might not need to raise rates further. The upshot is that no inflation is on the horizon and the central bank’s rate-hike campaign is done.
The good news on inflation and monetary policy tops a long list of bullish fundamentals. While the Leading Economic Indicators have declined for 13 consecutive months and the yield curve has been inverted all year, these two usually reliable early signals of a recession appear to be misfiring. The long list of bullish versus bearish fundamentals illustrates the mounting evidence that a new economic expansion is underway.
The Standard & Poor’s 500 stock index closed Friday at 4409.59, down -0.37% from Thursday, but surged by +2.58% from a week ago. It was the fifth straight week of gains for the index, which is up +97.09% from the March 23, 2020, bear-market low. The S&P 500 is still -8.07% lower than its January 3, 2022, all-time high.
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