Understanding the Current Inflation Landscape: Insights and Predictions

Introduction

Inflation is still sticky right now. Jerome Powell has come out and said that we are seeing a disinflationary environment. There are certain Fed presidents that are saying hey we need to cut interest rates right now. Jerome Powell is kind of saying the opposite of that.

Current Inflation Trends

Let’s take a look at some of the articles we have here. Powell says the Fed has made quite a bit of progress on inflation but needs more confidence before cutting.

We’re going to get to the Dot Plot to show you where a lot of these Fed presidents are, but it has been very, I would say, refreshing to see that Jerome Powell is standing firm on saying, “Hey, we do still have inflation. It is still hurting the day-to-day purchasing of everything for the vast majority of Americans, and we need to stay tough right here and make sure that we get inflation down.”

So inflation is still not at that, I would say, over the last decade 15 years, it’s still not at that level that people are used to.

Detailed Analysis of CPI Numbers

If we look over the CPI numbers here, you can see that, yes, on a 12-month adjusted basis, we still have these high numbers. So overall, it’s 3.3% for food at home and 2.1% for food away from home, meaning restaurants. It’s at 4%. Now, you come down to energy. Energy is still a little bit high. This is a big number right here: gas services at 5.9%.

And if you see some areas where we have cuts, we have them in these commodities areas without the food and energy. So if you strip out food and energy, which are volatile, then yes, things are getting better. But if you look at the real overall of what is affecting you day-to-day, I mean

Impact on Consumer Spending

Think about it right now: you go to the grocery store, you used to spend $70, and now you’re spending $100 to $120 on the same items. That takes its toll over a long period of time. Healthcare services are up 3.1%. Transportation services, which is a big one for people, especially those who live in metropolitan areas, are up 10.5%.

If you look at the used car space overall over the last 12 months adjusted down 99.3%, but remember where that was, we were at these crazy, crazy levels of used cars because there were no used cars. And if you just look at the end of May, this is the last report that came out. You are seeing gas prices coming down and a little bit of new vehicle prices coming down, but you still have that stickiness.

So when Jerome Powell came out and said we’ve made good progress on where inflation is, but we need to keep waiting, he said something else. He said we’re back on the disinflationary path but need more confidence. And if you come to the Everything Money website, you have the Fed president Goolsbee say policymakers should prepare for rate cuts.

Market Predictions and Fed Policy

So that brings me to my next point of where does the market think that rate cuts are going to go. If we come over here to the CME Fed Watch tool, this is basically, I wouldn’t say, a betting system, but this is where the market will project that rate cuts will go for the foreseeable future.

And if we take a look here, 91.2% think that by the next meeting, which is at the end of July, so 29 days from now, we are going to remain the same 5.25% to 5.5%. As we progress further in the year, this is September. The majority of the market is seeing that we’re going to get a rate cut, and it’s going to be 25 basis points, 63.2%.

And as we progress towards the end of the year, still in that five to five and a quarter range, then the majority think that by December, we’re going to have another rate cut. My personal opinion is we will get one, maybe one. That is where I’m going. We have other people, our analyst Dton, who actually thinks that rates are going to go up before they come down, which is a very interesting point.

I actually do think that rates need to be higher right now, why? Because if you really want to tame inflation, you need to grab it by the horns.

I don’t think that it would, I think it could be detrimental to where things are at right now economically, but it’s kind of the push-pull that Powell and the other Fed presidents are thinking about right now. Now, this is an interesting article that came from Fox Business. It was an analyst that said that stocks could fall 30% as the US heads toward a deep recession.

Concerns Over Economic Recession

So, as we get into this article, this analyst says that he could see either this year or early 2025 that we are going to get a 30% drop from current levels on the S&P, which would put us at about 3750.

He believes this will happen if the labor market slows notably in the coming months, which will weigh heavily on consumer spending. This brings me to another point: consumer sentiment is at a low. It’s the lowest level since mid-2021, so that’s where consumers are right now.

A major driver of economic growth is consumer spending, of course; it’s about 70% of the US economy, and that is where this guy thinks it’s going to go.

I don’t know.

I think that might be a little bit extreme, but this does bring up the point of the labor market. The extremely strong labor market right now is just not what you need in these situations. We actually need unemployment to be a little bit higher; we need people who are not employable to not be employed.

Right now, we’re seeing people that really should not have a job that are having a job. If you guys know anybody that you work with or small business owners, they’re probably saying we’re working with people that should not be working here, they don’t know what they’re doing, they’re lazy, this and that. That brings on stress to the economy that should not be there.

Conclusion and Future Outlook

So if we look, going back to the interest rates, I want to come over here to the Dot Plot. This was put out June 12th and basically gives you a range of where the Fed presidents that get to vote say that the interest rates will be for the foreseeable future. So if we look at 2024 end of the year, the majority of Fed presidents are sitting in this 4.75% to 5.25% range, somewhere in there.

It’s about hovering around 5%. And as we go into the future, 2025, the majority are sitting slightly under, slightly above 4%, which is four to four and a quarter. Then you go into 2026, it’s back to three, and then you’re kind of in this 2.5% to 3% range. If you go back to the Dot Plot that was in mid-2023, it did not look this way at all.

It was showing that we were going to have all these rate cuts coming in because they thought inflation wasn’t going to be as sticky as it is, but it is sticky, and it has stuck around for quite some time and is still sticking around. You have not seen prices drop on certain items.

Something else that’s hurting, you think about an item that cost $3 in the past, they moved it to six, they’re not dropping that thing back down to $3, maybe they’ll drop it to $5 or $5.50, but it’s still going to cost more and that hurts the daily consumer. You think about credit card debt right now, credit card debt is at its highest level ever, delinquencies are at its highest level in, I don’t know if it’s ever, but it’s a very, very long time if it hasn’t happened that way.

Used car delinquencies, there’s a problem there.

You have the home market. There’s not a lot of supply out there.

People are not moving because they’re locked into some really crazy low rate, like 2.5% to 3%. Why would you move if you don’t have to? So that is another issue. So you put all these things into the bowl of this recipe you’re creating. How long can it go before something breaks?

And I think that’s where this analyst from Fox Business, not he doesn’t work for Fox Business, but that was on Fox Business, is kind of going. You kind of put all these things into the pie. What happens next?