On the 13th of July, the US reported its highest inflation rate in 40 years, a whopping 9.1% in June which exceeded expectations of 8.8% by a mile. Last week, the US reported that annual inflation fell to 8.5% in July.
Since the 13th of July, the three major US stock market indices, the S&P 500, the Dow Jones Industrial Average and the Nasdaq, are all up about 10%.
Why are stock prices rising when inflation is still high?
Let’s Deconstruct Inflation
How is US inflation calculated?
US inflation is calculated using a metric called Consumer Price Index (CPI). CPI is a measure that uses a “basket of goods” that aims to compare the costs of various consumer goods and services. The basket includes food, transport, rent, clothes, haircuts, tuition etc., in the US. There are 80,000 items included in the basket.
Each month, data collectors from the US Bureau of Labor Statistics (BLS) visit, call or check the websites of thousands of stores, offices, and other businesses to assess price information nationwide. Specialists then examine the data to ensure it’s accurate and make statistical adjustments where necessary to calculate the CPI figure.
A Closer Look at June’s Record High CPI
Although oil prices fell 20% in June, the June inflation number did not reflect the substantial decline in gas prices that came later in the month. It only captured the average over the month.
Core inflation which excludes more volatile items like energy and food fell under 6% for the first time since January. However, core inflation rose 0.7% from May, the fastest rise seen over the last year, because US rent increased sharply.
Home sales fell 5.4% in June as rising interest rates made mortgages more expensive. This indicated that the Fed’s interest rate hike is working; house price inflation is cooling down. The US 30-year mortgage rate rose to 5.82% in June from 3% at the start of 2022.
Other Good News
Jobs and Sales
Despite recession fears, US jobs and unemployment numbers have been holding strong in the last two months. 372,000 jobs were created in June, while 528,000 were created in July, more than double the expectations of 250,000.
Retail sales data was also better than expected in June, rising by 1%, and May data saw an upward revision. The University of Michigan showed that consumer confidence has been growing since June.
This data shows that Americans are still spending more amid rising inflation and recession fears. The strength of the labour market also means the US economy is in a better position to recover from a recession than initially expected.
In July, Russia & Ukraine signed an agreement to allow 18 million tons of wheat, corn, and other crops to pass through key ports on the Black Sea. This increase in the food supply could help reduce soaring food prices.
The US also clarified that sanctions against Russia don’t apply to Agricultural trade. This could allow Russia’s food and fertiliser exports to return to the market, allowing farmers to increase production and food supply.
Oil Prices Calm Down
Energy prices have been falling since June. Biden brokered a deal with the Saudis to pump more oil to meet demand, which should tame energy prices. WTI oil futures are currently trading at around $91. In June, at its peak, it was trading at over $120 a barrel.
The Market Overreacted to Inflation Print
When the US recorded 9.1% inflation in June, the market initially feared that the US Federal Reserve could raise interest rates by 1% in July. The Fed opted for a 0.75% increase.
The fall in inflation between June and July and strong employment levels have made investors more confident that the Fed will not inflict more pain by raising interest rates at rapid rates.
The next rate hike from the Fed will be coming next month. According to the CME Group’s FedWatch tool, traders now foresee a 45% chance the central bank will raise interest rates by 0.75% in September (compared with 68% before the July inflation was released) and a 55% chance of a 0.50% hike.
Has inflation peaked?
At this point, market participants have given up on trying to predict when inflation has peaked. Investors previously thought inflation peaked in March, but April came with a higher than expected print and June recorded even higher inflation.
Some investors are now claiming the market bottomed in June. It’s difficult to call the market bottom because there is still so much uncertainty. Markets will likely remain volatile until the end of the year as investors look for certainty on inflation. See how Rise is managing investors’ money in these tumultuous times.