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We Keep Walking Backwards on the Price Inflation Timeline

CAMS Weekly View from the Corner – Week ending 2/24/2023

February 27, 2023

The Federal Reserve’s Open Market Committee (FOMC) as frequently expressed by Chairman Powell has been consistent on breaking down our price inflation issue through different areas of the economic system. We have chronicled in various editions several areas they have focused on with an emphasis on Services inflation in light of Powell’s consistent acknowledgement of its importance as well as its consistency in remaining elevated. If you think through your daily life as a household/consumer you realize Services is a large aspect of the U.S. economy.  Simply stated, Service’s relentless price inflation trend is a notable problem. At the same time it has been consistently offered to us for months now how inflation has peaked, it is consistently trending down and will be a non-issue relatively soon and with this, as a logical follow-on, the Fed will pivot to lowering interest rates. If this is the case we cannot help but ask why then is the FOMC’s focused area of the price inflation storyline continuing to walk us backwards on the timeline relative to the last time we had seen this level of inflation? If we offer in narrative form the last time we seen this price inflation level was 1990 and then several months later offer an updated version that this is the highest since 1984 can we honestly say we are trending downward in the overall price inflation storyline and that it is a foregone conclusion that it will be a non-issue soon? Interestingly, this is precisely what is happening relative to the focused and preferred price inflation sub-component of the FOMC.  Specifically, Powell and friends have offered (as well as previous Fed Chair persons) the Personal Consumption Expenditure Price Index (PCE) is their go-to preferred measure.  Within the PCE inflation measure there are sub-components – namely Services. 

The above depicts the PCE – Services price index and dates back to 1960 for a broad perspective.  Our lower line (red arrow) identifies the inflation rate in the Services price index as of mid-summer 2022.  At that time, as the red arrow walks us back in time, we see we were experiencing price inflation in Services that dated back to 1990 levels. As months have unfolded our top horizontal line reflects our current Services price inflation level which walks us back to 1984.  Note the clear uptrend remains intact when viewing the overall trend of the previous two years.  Importantly, in addition to the overall trend of the previous two years said uptrend remains intact when viewing the trend between the two red lines.  This compressed time within the overall uptrend reflects the previous seven months – think no let up in trend. While the general and consistent narrative has been price inflation is a soon to be non-issue we simultaneously have been experiencing a consistent and unrelenting uptrend in one of the largest economic segments of society.  Even more important we are registering these results from the FOMC’s favored measure (PCE) as well as their most concerning sub-component (Services) within said measure. Collective Market Participants Collective market participants have been chiming in with the general sanguine forward looking inflation narrative via their messaging left in the wake of their market operations.  In our edition beginning the month of February we shared how broad financial system participants, to include market participants, have been easing financial conditions all while the FOMC has been trying to tighten financial conditions. This issue has reached a point where general financial system observers have raised questions to the Chairman as to how the FOMC looks at this and if they feel it is negating their general price inflation fighting operation.  This easing of general financial conditions has been on-going since October. There are several ways to depict the easing of financial conditions which we had shared one in the aforementioned edition a month ago.  This time we look at a measure that points right to market participant operations.

Click For Larger View:

Above is the S&P 500 Volatility Index encompassing the previous year of trading.  This index is also known in slang as the “fear index” as it moves upward as general concern, if not outright fear, enters the collective market participant psyche. As the broad financial system eased financial conditions the above Volatility Index began a downtrend.  Our blue line highlights the established downtrend in Volatility which began in October. Importantly, the downtrend line has ended as collective participants have begun to reassess their sanguine view of the forward inflation/interest rate expectation.  This has entered the scene via several updated economic/inflation measures whereby the sanguine view is being upended with continuing data that is offering a more concerning forward view on the inflation/interest rate expectation. With this as February has unfolded general markets, to include the stock market, have become more volatile, choppy and challenged.  The sanguine “…inflation is a non-issue and the Fed will pivot to cutting rates soon…” narrative is being reevaluated by collective market participants and with this they are leaving a more volatile market storyline in their wake. The bottom line is and has been very simple:  The FOMC is serious about price inflation generally and quite concerned about Services inflation specifically and neither is providing a cozy and consistent down trending experience regardless of general drumbeat type narratives. As long as this continues we expect on-going volatility as collective market participants constantly assess and reassess the inflation/interest rate backdrop.  It is murky out there in the general economic landscape and with this market volatility makes sense as participants struggle with seeing the near-future. I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis


H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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