INFLATION – UP OR DOWN?

Which direction are we going? The topic is mainstream conversation in the news lately. Economic experts are weighing in and considering various indicators. The predictions are all over the map. Information about economic indicators can get confusing and convoluted quickly. What the average consumer knows is that they are paying more when they go to the grocery store, out to eat, or fill up their tank of gas. Federal Chairman, Jerome Powell adopted the adage, higher for longer, as he remarked on interest rates in the post-COVID market. Interest rates have remained higher for an extended period, but for those paying attention to the rising cost of goods, the burning question is “how much longer?” While the cost of goods is not going down, it is also not increasing at the same rate. 

Let’s review a few key areas…

Stock Market. Markets showed signs of out-performance at the end of 2023, and they remain strong into January 2024. Some stocks have had phenomenal gain and continue to do so. This could be an indication that equities will expand; however, an election year has historically added some volatility to the market. 

Housing Market. To combat inflation the Federal Reserve has increased interest rates over the last two years. The impact typically effects real estate values negatively. The cost of lending increases. However, the exact opposite has occurred. Almost nationwide, housing values have increased. 

Those who purchased their homes 2-3 years ago were able to lock in interest rates in the 2-3% range, a record low. Many existing homeowners took advantage of the low interest rates and refinanced. Now, those same homeowners would be shocked to see the difference in the cost of their mortgage at 7-8% rates if they wanted to refinance.

Despite higher interest rates, housing markets have remained steady. Why? Lower interest rates mean fewer people are wanting to sell their homes. Approximately 40% of American homeowners own their homes free and clear. The other 60% have taken advantage of the lower interest rates and refinanced. The demand for housing remains, and as a result, new homes are being built. These homes are being sold at a higher price. 

Job Market. If you live in the Southern California area and drive local freeways, you know that the job market is thriving! Traffic seems to be nonstop. It’s one visible indicator of the local job market. Nationwide, jobs are remaining steady, and when you focus in on Riverside and San Bernadino counties, you find some remarkable statistics. These two counties represent 20% of California’s new jobs. The pandemic drove rapid growth for online shopping and as a result, logistics. The Inland Empire region is a hot spot for transportation, warehouse, and utility employment, representing a 24% share of the state’s jobs in these fields (Lansner 2024). 

Recession. The economy moves in cycles and for that reason, economists try to tell us when we can expect a recession. It just didn’t happen in 2022 and 2023, as widely predicted. Instead, the last two quarters of 2023 exhibited strong growth rates in real GDP at 4.9% and 3.3% (Yardeni, 25 Jan 2024).

Productivity growth has helped to hedge inflation and boost real wages. Consumer spending was up by 2.8% at the end of last year. While some bullish sentiments remain, it appears that we have avoided the recession altogether. The growth in the market appears to offer good entry points and opportunities for long-term investors.

Resources:

Hansen, Sarah. “December CPI Report Forecast Shows Core Inflation Slowing as Markets Await Rate Cuts.” Morningstar, 9 Jan 2024, https://www.morningstar.com/markets/december-cpi-report-forecast-shows-core-inflation-slowing-markets-await-rate-cuts

 Lansner, Jonathan. “State’s top job creator is Inland Empire.” Press Enterprise, 28 January 2024, p. E1. 

 Yardeni, Dr. Ed. “The US Economy Remains Bullish.” Yardeni Quick Takes, 25 January 2024, https://www.yardeniquicktakes.com/the-economy-remains-bullish/?ref=yardeni-quicktakes-newsletter