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Inflation, Inflation, Inflation

In the latest LPL Market Signals podcast, Fixed Income Strategist Lawrence Gillum and Chief Economist Dr. Jeffrey Roach discuss what the higher than expected August CPI report means for the Fed, the markets, and if a soft landing is still in the cards.

CPI report surprised to the upside

The August Consumer Price Index (CPI) rose 8.3% year-over-year (YoY) from 8.5% in July. Excluding food and energy, the core CPI rose 6.3% (YoY), accelerating from last month. Both headline and core inflation were higher than analyst expectations. Inflation pressures continue to ease in a few categories such as gasoline, airfare, and used vehicles. However, several categories are still running hot. Food prices rose 11.4% from a year ago, the largest year-over-year increase since 1979, and electricity prices increased 1.5% month-over-month, the fourth consecutive monthly increase. However, as import prices and producer prices ease, the inflation outlook should improve.

How Does the Fed’s Reaction Function Change with Today’s Report? Is a Soft Landing Still Possible?

Headline inflation is likely past its peak, but the Federal Reserve (Fed) still has work to do. The Fed will likely increase rates again by 75 basis points later this month as core inflation is not cooling as fast as expected. The Fed has two more meetings after next week’s meeting, and we’ll likely continue to see interest rate hikes at those meetings as well. The real risk to the economy is in 2023 when higher interest rates will likely flow into the real economy. At this point, we think there is a 50/50 chance of a recession in 2023.

What Does the Inflation Report Mean for Stock and Bond Markets?

Right after the CPI print was released, equity markets were sharply lower and bond yields sharply higher. With the Fed likely having to hike interest rates more than markets were originally expecting, that has put upward pressure on short-term yields. And with the prospects of higher rates, equity markets sold off broadly with all sectors down after the report.

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IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth in the podcast may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. All indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Stock investing includes risks, including fluctuating prices and loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the performance of 500 large companies listed on stock exchanges in the United States.

The Bloomberg U.S. Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States.

All index data is from FactSet.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This Research material was prepared by LPL Financial, LLC. 

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