The Economy and The Fed
The Fed’s “preferred” inflation gauge, the Personal Consumption Expenditures or PCE, not only came in worse than expected, but the prior three months were all revised higher. The whole thing throws cold water on the ‘disinflation’ buzz and the rally we’ve seen so far this year. On a year-over-year basis, the PCE Price Index for services spiked by 5.6%, the worst since 1984. This matters because services is where inflation is running hot and makes up almost two-thirds of consumer spending. This higher reading is not what the Fed wanted to see, so we expect further rate hikes, which will lead to a more volatile market than what investors were hoping for coming into this year. This makes the Fed’s job extremely difficult in bringing down inflation without significantly hurting the economy. We will continue to watch this closely.
The chart shown in this episode shows the most recent year-over-year changes in the cost of selected items in the Consumer Price Index. The chart shows that services have been the most inflationary. Airfare costs are up, along with hotels, food, and others. However, gasoline is down 1.53%, and used car prices are down nearly 9%. During the pandemic, there was an increase in electronic purchases, such as TVs. However, last year the data shows that television prices dropped 14.40%. Another chart in this episode shows how price changes in consumer goods and wages have developed since 2000. It shows that anything technology related has been deflationary. In 2000, technology items, such as TVs, toys, and computer software, were more expensive and have continued to decrease in price over the years. On the opposite side of that, hospital services, college tuition, medical services, housing, food, childcare, and hourly wages have continued to get more expensive.
As long as inflation remains elevated, we will continue to see increased market volatility. After the third week of a declining market, we’re analyzing our technical research closely. We would like to see the S&P 500 stay above the 200-day moving average of 3942. Numerous Federal Reserve officials are speaking this week, and several important economic reports are coming out. For those viewers who like to track the markets throughout the week, keep an eye on the 3942 level on the S&P 500. The market must hold this level as we continue to deal with higher inflation.
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