Is Inflation Peaking?
In last week’s update I talked about inflation news and how it was impacting the overall health of the economy. It also is significantly impacting the Federal Reserve’s posture regarding future interest-rate increases.
Hawkish Federal Reserve
Various Federal Reserve Board of Governors have stated on the record that they anticipate raising rates quickly as a way to hedge off high inflation1. These public announcements are part of the Federal Reserve’s strategy to talk inflation down as best they can without actually raising rates. Still, it’s clear that they will likely raise rates and Chairman Powell has specifically mentioned this fact.
But in this gloomy forecast regarding inflation, it’s important to look at some signs that inflation may be starting to slow. Housing prices have begun to drop as mortgage rates have risen. This creates an environment where less money is floating in the financial system from the sale of properties.
Used car prices are beginning to stabilize and it now appears as if a healthier price relationship between new and used vehicles is beginning to emerge. To be sure, energy prices continue to rise and that will certainly stoke inflation data. Still, there are signs that inflation is starting to cool.
Supply Chain Issues
Recent rumors regarding Apple iPhone supply chain suppliers suggest that the component shortage is not quite as severe as some had thought. Because components of iPhones go into the final pricing for the finished product, it is a positive sign that supply chain concerns may be not quite as bad as some people have feared.
Shanghai and Beijing are beginning to open again, Tesla‘s manufacturing plant in Shanghai is likely to continue to ramp up and it does appear as if economies around the world are beginning to stabilize such that supply chain concerns may be somewhat easing.
This is not to say the supply chain concerns will not continue to impact inflation; these bottlenecks will have an impact. But perhaps there is a ray of hope that rapid inflation is not a given.
Positioned For Higher Inflation
Our portfolio strategies are continually analyzed to determine whether or not they are appropriate in an inflation environment. We continue to look through earnings reports for clues as to whether or not inflation will negatively impact earnings.
We are positioning portfolios on the assumption that higher inflation is here and will remain, but that rapid inflation will likely not be the outcome in 12-months.