The Week in Review: January 16, 2024
To Measure Inflation, Let Me Count the Ways
Investors eagerly anticipate the government’s monthly release of the CPI (Consumer Price Index). Why? Inflation affects everyone, and investors are no exception.
The Federal Reserve’s efforts to curb inflation led to a bear market in 2022. However, fewer interest rate hikes in 2023 and a more lenient stance by the Fed contributed to the market’s recovery in 2023.
Last week, the U.S. Bureau of Labor Statistics (BLS) reported that the CPI rose 0.3% in December. This is a rise of 3.4% compared to a year ago, which is higher than the 3.1% increase seen in November.
The core CPI, which excludes food and energy prices, also increased by 0.3%. Compared to one year ago, the core CPI is up 3.9%, slightly lower than the 4.0% increase in November.
Progress on inflation is clear, but it has been slow and uneven.
In fact, progress on the core CPI, which excludes food and energy, has almost stalled over the last four months – Figure 1.
But Fed officials are hinting at rate cuts this year, and some measures of inflation are much better behaved.
If we exclude the cost of shelter, such as housing and rent, the inflation rate has remained around 2% for the past four months – Figure 1.
The Fed’s favorite gauge
There are two main ways to measure inflation: the Consumer Price Index and the Personal Consumption Expenditures (PCE) Price Index.
Although the CPI is more well-known, the PCE is the Fed’s preferred inflation tracking method.
Recently, the PCE has decreased at a faster rate than the CPI. According to the St. Louis Federal Reserve, their methodologies differ, often resulting in a higher CPI than the PCE. As of November, the core PCE Price Index was up 3.2% compared to the previous year.
The six-month annualized rate, which detects trends faster than the annual rate, illustrates that progress has been significant. In November, the rate was up 1.9% - Figure 2.
The six-month annualized rate takes the actual change over six months and doubles it.
It’s not that the PCE is better than the CPI or vice versa. Both have their advantages and drawbacks. That said, they are both very comprehensive yardsticks.
The bottom line is that a slowdown in inflation benefits everyone, including investors, as progress on the pricing front has nearly shut the door on further rate hikes, increasing the odds the Fed will cut interest rates this year.
Market Summary
Two For the road
Because guinea pigs are social creatures who become lonesome without a friend, it’s illegal to own just one of them in Switzerland. The law was introduced in 2008 as part of a legislative effort to grant social rights to pets. Should one guinea pig depart this mortal coil and leave its companion alone, Rent-A-Guinea-Pig service has emerged as a temporary solution. Goldfish are also prohibited from being kept alone, and cats must at least have access to a window where they can see their fellow felines prowling around.- Interesting Facts, January 2024
An iPhone that was sucked out of an Alaska Airlines flight and dropped 16,000 feet was found. It was still working, and unlike the plane, it was still in airplane mode. - CBS News, January 11, 2024
Please do not hesitate to contact me with any questions or concerns. I hope you have a wonderful week!
Bill Stordahl, CFP®
Managing Director
Stordahl Capital Management
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