MARK-TO-MARKET: Inflation dips to 6.4%, Wall Street remains cautious

On Tuesday, the Department of Labor released its latest update of the Consumer Price Index (CPI) that gave Wall Street insight on the state of inflation. The January CPI reported that inflation fell from an annualized rate of 6.5% to 6.4%. But rather than break out in celebratory cheers and applause, Wall Street’s tone quickly became more reserved. As Wall Street dissected the latest date, the consensus became clear. Inflation is still running much hotter than we’d like to see. Moreover, inflation continues to hit consumers the hardest in one of their most vulnerable areas — basic necessities.

Though inflation fell from 6.5% to 6.4%, Wall Street was expecting a decline to 6.2%. For the 31 days in January, consumer prices rose a hefty 0.5%, well above December’s 0.1% monthly gain. More than half of the 0.5% increase was from the rising cost of shelter. Combined with the rising costs of food and energy, these three items accounted for 92% of the net monthly increase in consumer prices in January. Core inflation, which strips out the more volatile and seasonal food and energy prices, fell from 5.7% to 5.6%, above Wall Street’s forecast of 5.5%. Core prices rose another 0.4% in January.

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The bigger picture for Wall Street is the future outlook of inflation. On the positive side, inflation continues to gradually subside from its peak of 9.1% back in June. However, January’s CPI report conveys that consumer prices, especially among basic necessities, will likely remain historically high for most, if not all, of 2023. Even though inflation has eased to 6.4%, that means that consumer prices are now 6.4% higher than they were 12 months ago. Wall Street’s concern is the continued impact on the American consumer. For two years, household budgets have been upended by stubbornly high inflation.

At 6.4%, inflation still has a long way to go before it returns to the Federal Reserve’s 2% target rate. The last time inflation was below 2% was in February 2021 (1.7%). Moreover, for nearly two years, the rate of inflation has surpassed annual wage growth, which currently stands at 4.4%. To fill the gap between rising consumer prices and wage growth, consumers have been forced to pull money from their savings and retirement accounts. It’s also led to skyrocketing credit card debt.

Total consumer credit card debt in the nation has reached a record-high $930.6 billion. This is up a massive 18.5% in the past 12 months. The number of credit cards held by consumers now totals 518.4 million, the first time ever that number has breached the 500 million mark. The average consumer now carries $5,805 in credit card debt. Credit card delinquencies, defined as being late on your payment by more than 30-90 days, have risen 20.3% over the past year. In summary, not only are Americans taking on a lot more credit card debt, they’re also having a much harder time in paying that debt off.

For Wall Street, the hotter-than-expected inflation report reignites concerns the Federal Reserve will continue its aggressive pace of interest rate hikes. Since March 2022, to help tap the brakes on rising consumer prices, the Fed has raised the benchmark fed funds rate from near-0% to between 4.5% and 4.75%. This has been the fastest rise in the fed funds rate since 1980. The fed funds rate often serves as a basis for many other forms of consumer debt. When the fed funds rate goes higher, it tends to drive interest rates higher on credit cards, bank loans, lines of credit and home mortgages, among others.

Before Tuesday’s release of the CPI, Wall Street hoped the Fed might be done raising interest rates given the ongoing decline in inflation. But the data suggests the Fed may very well be forced to raise the fed funds rate another 0.25% at both its upcoming March and May meetings. More importantly, the latest data indicates the American economy may have a long way to go before it reaches the Fed’s 2% target rate of inflation.

Mark Grywacheski is an expert in financial markets and economic analysis and is an investment adviser with Quad-Cities Investment Group, Davenport.

Disclaimer: Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Quad-Cities Investment Group LLC is a registered investment adviser with the U.S. Securities Exchange Commission.

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