Welcome to the latest LPL Street View. I’m Jeffrey Roach, Chief Economist for LPL Financial and in this edition of Street View, we will discuss TWO KEY variables that could help us with this nagging inflationary problem we have right now.

Ok, so here is the first variable that could help ease some of the pressure off of the high prices we have right now    and that variable is    a strong US dollar.  Of course, we know that a sustained strong dollar will eventually give us some pricing power in the global markets and pull down import prices, right?   The year twenty twenty two started out with import prices rising very quickly on a monthly basis.  In just the thirty one days of January, import prices rose two percent and then import prices rose another two percent month over month in February and then roughly three percent in March! These import prices were running hotter than the CPI over that same time period!  As the dollar has rallied in recent months, import prices have also cooled. For example, June import prices barely rose two tenths of one percent, the lowest in six months. It will take some time to filter through to the end consumer, but I believe the recent trends in the US dollar could keep import prices at bay and by transmission, tamp down some of the import sensitive consumer prices.  So a strong US dollar is the first variable to think about with respect to these pesky levels of consumer inflation.

The second variable that could help investors right now is FED policy. You say what? We have been warning that the Fed can’t do anything about a lot of the inflationary pressures because inflation has been driven by these supply bottlenecks. Well, the good news is that as of last CPI reading, the supply contribution to inflation fell and the demand-driven contributions to inflation became more of a dominant factor. So, this fits perfectly into the script for the Fed. We know their monetary policy tools, albeit blunt, are suited for tamping down aggregate demand and as Chair Powell himself warned and I quote, “our tools don’t work on supply shocks.” Fed policy works on a lag, meaning that a Fed decision takes some time to get worked through the system, but we think that this second variable, namely, Fed monetary policy, may actually be the second big factor for addressing the current inflationary problems in the US as inflation rotates to a demand - induced problem and less of a supply - induced problem.

So what does this all mean for investors? It means that the July CPI print could very well be softer than the June print.  And, it means that the PCE deflator, the Fed’s preferred inflation metric could likely be softer than the headline CPI.   So if markets and market watchers are convinced that inflation rates are going in the right direction,   we may finally have some of the necessary ingredients for better trading days ahead.



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