This week, the average price of a gallon of gas climbed to $3.83, the highest in 10 months.
I swung by the gas station on Tuesday and paid $50 to fill up my tank. That hasn’t happened to me in a while.
The past few months of soft landing talk has felt good for our confidence and our portfolios.
Now, with higher gas bills and soaring interest rates, it seems too good.
Signs of faster inflation — a natural byproduct of good times — are popping up again. And this week, Consumer Price Index data confirmed our fears.
Inflation is moving in the wrong direction. Again.
Back to square one
On Thursday, CPI data showed prices grew 3.2% year-over-year in July, a faster pace than the 3% increase in June. It was the first time inflation picked up in nearly 13 months.
Much of the sudden increase in inflation was from higher gas prices — that annoying trend you’ve probably noticed already at the pump.
This may not be a one-month blip, either. Americans’ inflation expectations have started rising again, and the Cleveland Fed forecasts that year-over-year CPI probably increased this month as well.
Sure, we may have avoided the dreaded recession. But in some ways, it feels like we’re back to square one — spiraling inflation that the Fed needs to hammer down through higher rates.
If you’re worried about another inflation crisis, your feelings are valid.
But I want to make one thing crystal clear: we are probably not in the same situation as 2022. Far from it, actually.
You can see this ring true in several real-time inflation measures. Shipping container costs are 83% lower than they were two years ago. Housing market activity has been blunted since the beginning of last year, while rental inflation has been dulled by more than 70%. And even though inflation expectations are back up, they’re drastically lower than where they were a year ago.
People are feeling less motivated to spend their money as well. While the job market has held up well, it’s become less accommodating. Job openings are down and layoffs are still making news. As painful as this has been, it’s helped tame inflation through lower spending and more saving.
Take services inflation — the part of CPI that’s more influenced by demand than supply chain issues. Services inflation (excluding rent) rose just 3.4% year over year in July, a far cry from the 8.5% pace late last year.
To me, these signs point to one overarching message. Inflation may increase from here, but it’s much less likely to spiral out of control.
The fear of a spiral is what made 2022 so scary, too. We had no idea how high inflation would go, or how long it would take to return to normal. You can’t say the same thing today. Economic growth is much more restricted, even if normal is still far away.
A selloff vs. a crisis
Now, just because inflation may not increase too much from here doesn’t mean you should ignore it.
Stubbornly high inflation — even at 3 or 4% — can cause problems. The Fed may have to hike rates even more to ensure this doesn’t happen, and we all know how much a hiking Fed can freak markets out.
The type of inflation we’re seeing could also weigh on wallets and warp Americans’ perceptions of the economy. Food, housing and transportation costs make up 60% of the average American’s budget, and both food and gas prices are re-accelerating. Inflation hits differently when you’re reminded of it every time you drive on the highway or purchase your weekly stash of groceries.
You may already see higher inflation seeping into your portfolio. Tech stocks are starting to crumble, with the tech-heavy Nasdaq 100 mired in a 5% selloff. Risky investments — from speculative tech to smaller crypto protocols — are getting hit even harder. Markets are having trouble adjusting to inflation’s mixed messages, which appears to be enough to trigger a quick summer swoon in prices.
But just like rising inflation — a selloff doesn’t necessarily mean a crisis is coming. You may just need to tweak your investing approach over the next few months. This may not be 2022, but 2022 could provide us some interesting lessons on how to cope.
If the economy is truly doing well enough to spark inflation, maybe it’s time to start looking at more cyclical parts of the market. Keep an eye on which sectors are cheap — or value stocks, as Wall Street calls them. When bond yields are high and inflation is rampant, investors are more likely to look for profitable, under-valued stocks.
Don’t get too carried away, though. Remember — an inflation spiral looks unlikely here, and the Fed is ready to snuff out growth if it becomes a concern.
So what does this mean for me?
Don’t panic. This may feel like deja vu, but it’s a different situation than we were in just a year ago. Remember that bull markets usually end with recessions or market crises — both of which don’t look likely at the moment.
Consider the good news. The tide in market leadership has turned, with cyclical — or economically sensitive stocks — driving the rally. Good news about the economy could be seen as bad news, at least for now. But it’s good news if you’re worried about a recession.
Think about the opportunity. Energy prices are driving inflation higher. Sure, higher gas prices are a pain, but they could be a boon for energy stocks — one of the cheapest sectors in the market on a price-earnings basis. Think about how to protect your portfolio if higher inflation causes a panic in stock and crypto prices, but remember there are usually two sides to every trade.
*Data sourced through Bloomberg. Can be made available upon request.