Inflation news has been a major driver of markets this year, with stocks popping on softer prints and sinking on hot ones. This has made it a good time to look for stocks that can weather inflation better than the rest of the market.
The Federal Reserve is trying to slow the rising cost of living in America, but its moves have already weighed on stocks as they make borrowing and doing business more expensive for companies. This week’s inflation news, a report that showed headline prices declined more than expected last month, could help the central bank reach its goal of reducing inflation without tanking the economy.
This year’s soaring inflation rate, which reached its highest levels in more than 40 years, was fueled by several factors including snarled supply chains, parts shortages, Russia’s invasion of Ukraine, and the Federal Reserve’s monetization of piles of pandemic-era debt. But now that those issues have cleared, inflation is likely to begin to level off and stay there for a while, according to economists.
Household Expectations Are Increasing
This is good news for consumers, who are enjoying lower fuel costs, higher wage growth and cheaper housing. And it’s also positive for the Fed, which has been slowly easing its rate hikes in order to cool inflation.
Inflation News That’s Not So Bad
Some of the biggest drivers of inflation have been gas prices and used-car values, but those prices have cooled over the last few months. This month, gas prices fell 1% while the price of new-vehicle sales stayed flat.
But prices in the services sector continue to rise. Restaurants and other service providers are raising the prices of their services, which tend to be more volatile than goods price changes.
And rent prices are still rising, albeit at a slower pace than before. This is due to a longer lead time for leases to come up for renewal, and we expect that it will ease down eventually.
What’s Next?
The Fed is looking to raise rates just a bit more this year, but the rate hikes will be accompanied by a slowing of economic growth. That will bring down the amount of money in circulation, which can help reduce inflation.
Inflation News That’s Good for Stocks
If the Federal Reserve is able to rein in inflation this year, it will be a great thing for stock markets. This can boost confidence and help bolster corporate earnings.
Ultimately, the key to the bottom line is whether the Fed can get inflation back to its long-term target of 2%. If it can, that would be a boon for investors, as it means lower costs and more disposable income for consumers.
This could also mean lower interest payments, which are an important source of revenue for many companies. And, if the Fed can get inflation down, it might be able to ease its hikes even more slowly.
The bottom line is that if the Fed can get inflation down to its long-term target, then it will be a boon for all Americans and help ensure that America doesn’t end up in another recession. This is good news for both the economy and the stock market, which is expected to gain this year.
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