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Key Points for the Week

  • The Consumer Price Index jumped 1.3% in June, beating expectations. Inflation has now increased 9.1% in the last year.
  • Retail sales surged 1.0% as higher prices and strong employment helped retail demand stay robust in the face of higher inflation.
  • Chinese GDP fell 2.6% in the second quarter. Lockdowns and a weaker property market caused the Chinese economy to shrink.

Series I Bonds

In June of this year, inflation hit a 40-year high and has been one of the most talked about topics over the last several months. With many consumers trying to find ways to ensure that their dollar is maintaining its purchasing power and keeping up with the current inflation rate, a potential alternative is to purchase Series I Bonds. You can learn the basics about Series I Bonds here, and if you are interested in discussing whether or not this is an appropriate investment for you, please contact us.

Economic Update

Last week, headlines blasted the new inflation numbers. Prices were up more than 9% year-over-year in June, according to the Bureau of Labor Statistic’s Consumer Price Index (CPI). When you dig into the numbers, energy prices were up 41.6 percent year-over-year and food prices were up 10.4 percent.

Prices are rising just about everywhere in the world, in part a consequence of Russia's invasion of Ukraine, which has elevated energy and food prices, and in part because of the supply chain bottlenecks that have driven U.S. prices up.

Paul Wiseman, U.S. News & World Report

The U.S. inflation numbers caused markets to tumble early in the week as investors speculated about whether the Federal Reserve would decide to raise the federal funds rate at a faster pace at its next meeting.

Ben Levisohn, Barron’s

Then the retail sales and consumer sentiment data arrived.

After adjusting for inflation, retail sales slowed in June, just as they had in May, reported Megan Cassella of Barron’s. Retail sales data are a leading indicator, meaning they provide information about what may be ahead, while the CPI is a lagging indicator that provides information about what has already happened. Slower retail sales suggest demand is falling and lower prices may be ahead. The news cooled some investors’ rate-hike concerns.

On Friday, the University of Michigan’s Consumer Sentiment Survey showed a modest improvement.

…consumer sentiment that had hit an all-time low in June improved slightly in July, likely a reflection of the recent fall in gas prices. And long-term inflation expectations dropped modestly over the month as well. Together, the latest data shows early signs that the Federal Reserve is making progress in its quest to cool the economy.


This Week in the Markets

The Consumer Price Index (CPI) leapt 1.3% in June, following a 1.0% increase in May. The measure of inflation has risen 9.1% in the last year and reached its highest level since 1981. Energy prices have been the top contributor in the last 12 months, responsible for 3.0% of the 9.1% annual increase. Core CPI, which excludes food and energy, rose 0.7%. Its annual level continues to slide lower, dropping from 6.0% to 5.9%. Shelter costs rose sharply as rents and housing prices pushed them higher.

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The U.S. consumer is holding up well despite the inflationary pressures. Before adjusting for inflation, June retail sales rose 1.0% and are 8.4% higher over the last year. When adjusted for inflation, consumers are paying more for slightly fewer goods as inflation has risen faster than sales. In June, the 1.0% rise in sales lagged the 1.3% rise in inflation, and the 8.4% yearly sales gain trails the 9.1% inflation hike. For example, gasoline station sales surged 5.9% because gasoline prices were significantly higher.

Chinese GDP fell 2.6% last quarter as China’s approaches to COVID-19 restricted economic activity. The shutdowns were major contributors to retail sales falling in April and May and only partially rebounding in June. The risk of future lockdowns continues to loom large on Chinese growth and the global supply chain.

Markets were lower last week, although a rally on Friday after the retail sales report helped narrow weekly losses. The S&P 500 and the global MSCI ACWI both fell. The Bloomberg Aggregate Bond Index rallied slightly. The Job Openings and Labor Turnover Survey as well as second quarter earnings are the key data points likely to move markets this week.

Inflation Spirals Higher

U.S. inflation continued to run higher in June. A monthly increase of 1.3% added to already high inflation and pushed the yearly inflation rate to 9.1%. As we shared last week, pay increases have been most rapid for those with the least education and lowest-paying jobs. While these pay gains have helped, this group is also the most vulnerable to increases in inflation as they spend a higher percentage of their incomes on basic goods and have less spending flexibility than higher earners.

Energy costs have contributed significantly to annual inflation. Although energy makes up only 7% of the basket of goods used to measure CPI, it has contributed 3.0% to the yearly inflation rate, accounting for nearly one-third of the increase. When combined with food and auto prices, the three categories contributed 56% of the inflation, yet make up only 28% of the basket. Any relief in these areas could help slow inflation.

The details of the report provided little positive news. A few travel categories reported lower prices, but those have still increased by more than the overall CPI average in the last year. A plethora of categories climbed more than 0.5%, suggesting inflation pressure continues to broaden.

Some relief on energy prices will help next month’s report. Gasoline prices have declined for more than 30 straight days, after peaking in early June. The average price in June was above May’s average, gasoline pumped inflation higher in June. That should reverse in July. Some factors working in the opposite direction will make next month’s inflation a tougher comparison. Monthly inflation ebbed lower in the third quarter last year. That means smaller monthly increases may still push the annual inflation rate higher than the already high 9.1%.

The Federal Reserve meeting in two weeks is the next big event in the ongoing fight to lower inflation. In its recent minutes and subsequent press appearances, Fed governors have gone out of their way to make up for being overly optimistic about inflation trends earlier. Since dropping “transitory” from its description of inflation late last year, the Fed has become more hawkish, meaning it has more will to raise rates. That hawkishness, combined with the big jump in CPI, has cemented expectations for at least a 0.75% increase in interest rates later this month. Some have begun to forecast an increase of 1.0%, matching the Canadian central bank’s recent hike.

A 1.0% increase seems a big step given the moves already made by the Fed and others. Even amid the high inflation, strong employment environment, and solid retail sales, there are signs the global economy is slowing. The International Monetary Fund (IMF) announced it will reduce its projections for economic growth for the second time in three months due to the ongoing war in Ukraine, higher inflation, and ongoing supply bottlenecks. Some Fed governors are counselling against raising rates too fast. Esther George, who leads the Federal Reserve Bank of Kansas City, worries, “…that a rapid pace of rate increases brings about the risk of tightening policy more quickly than the economy and markets can adjust.”

Interest rate hikes often slow the economy after a lag, as some economic momentum takes a while to reverse. The U.S. is not alone in raising rates. The U.K., South Korea, Canada, and Australia have all increased rates, which will help slow global activity. According to the IMF, 75 central banks have raised interest rates since July 2021.

We would prefer that the Fed take a pause and assess the impact of the previous rate hikes. It generally takes 90-120 days to see the full impact of a rate hike. Based on the signals the Fed is giving, we expect it will increase rates 0.75%. That attempts to balance the goal of taking big steps to curtail inflation while still giving the economy and markets time to adjust to a higher rate environment.

What’s the Difference Between Volatility and Risk?

Smooth sailing isn’t a term anyone would use to describe 2022. So far, it has been a remarkably volatile year. On more than half of the days during the second quarter of 2022, the U.S. stock market moved up or down by 1 percent or more.

The quarter had 10 days where the market moved 2% or more compared to a median of two days between 2019 and 2021.

Lauren Solberg, Morningstar.

While volatility is not the same as risk, the chances of incurring a loss may increase during periods of market volatility, in large part, that’s because investors become anxious about falling share prices and sell when they might be better off holding.

If you’re feeling overwhelmed and uncertain in this volatile market environment, give us a call. One of the most important services we offer is helping people stay calm and make sound decisions during difficult times.

Did you Know? This Week in History

July 19, 1799: Rosetta Stone Found

Although the exact date is unknown and debated, on what was likely July 19, 1799, a French soldier discovered a four foot long and two-and-a-half-foot wide black basalt slab with ancient writing near the town of Rosetta, about 35 miles east of Alexandria during Napoleon Bonaparte’s Egyptian campaign. The stone had three different languages inscribed on it: Greek, Egyptian hieroglyphics, and Egyptian demotic. The discovery of the artifact thus held the key to solving the riddle of hieroglyphics, a written language that had been “dead” for nearly 2,000 years.

Napoleon was known for his high regard for education, art, and culture, and when he invaded Egypt in 1798, he took along a group of scholars instructing them to seize all important cultural artifacts for France. One of Napoleon’s soldiers, Pierre Bouchard, was aware of this order and returned the stone to France upon his discovery. Three years later, when the British defeated Napoleon in 1801, the possession of the stone belonged to the British.

Several scholars attempted to translate the hieroglyphics on the Rosetta Stone, including Englishman Thomas Young and French Egyptologist Jean-Francois Champollion. Champollion, who had taught himself ancient languages, ultimately cracked the code and deciphered the hieroglyphics using his knowledge of Greek as a guide. Hieroglyphics used pictures to represent objects, sounds and groups of sounds. Once the Rosetta Stone inscriptions were translated, the language and culture of ancient Egypt was suddenly open to scientists as never before.

Weekly Focus

The trouble with the rat race is that even if you win, you’re still a rat.

Lily Tomlin, Actress

If all politicians fished, instead of spoke publicly, we would be at peace with the world.

Will Rogers, Vaudeville Performer