Telemus Weekly Market Review October 9th - October 13th, 2023
This week inflation data for the month of September showed inflation running a tad bit hotter than economists expected. The annualized inflation rate, as measured by the Consumer Price Index, stood at 3.7%. This is up from June when it bottomed out at 3.0%, but significantly better than the 9.1% inflation rate from back in June of last year. With inflation on the downtrend, and now seeming to settle in at a range much better than a year ago, why does the financial world remain focused on this economic measure?
A good graphical answer to this question comes from a simple chart published by Torsten Slok, the Chief Economist at Apollo Global Management. The chart, shown below, plots the current inflationary cycle, highlighted by the green line, versus the inflationary cycle of the 1974-1982. I should call out that there is a scaling issue with this chart, where the magnitude of the current inflationary cycle is indicated by the left axis and the 1970’s cycle with the right. However, the consistency in the pattern of the current cycle relative to the 1970’s is worth taking note of.
Inflationary Cycles - Consumer Price Index
What’s of particular importance at this point is the downtrend we’ve seen over the past year is consistent with the downtrend of 1975. Inflation settled in for several years before a resurgence in 1978. This historical experience is on the minds of officials at the Federal Reserve and something they don’t want to repeat. Therefore, the recent ‘higher for longer’ stance by the Federal Reserve is an effort to try and keep policy tighter and tame inflation in a more permanent way. The fact that the labor market remains resilient, despite the significant rise in interest rates, enables them to maintain such a strict policy.
By taking advantage of what are still favorable economic conditions and maintaining a tight monetary policy, thus far the Fed seems to be prudent and reasonable in their policy actions. However, while higher for longer may be appropriate today, we recognize a swift unexpected change in economic conditions can alter the Fed’s ability to maintain its current policy in the fight against longer-term inflationary threats.
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