Inflation and Diversification: From Wreckage to Rebound?

September’s Consumer Price Index (CPI) from the Bureau of Labor Statistics said inflation was 8.2% year over year, hotter than many expected. This inflation report solidifies our expectation that the Federal Reserve (Fed) will likely hike the federal funds rate by 75 basis points (bps; 100 bps = 1.00%) in November and by another 75 bps in December.

The Fed: Boring Is Great

The Federal Open Market Committee just hiked its federal funds rate target another 75 basis points (bps; 100 bps equal 1.00%), to a range between 3.00% and 3.25%. Hiking rates aggressively is risky when housing is already struggling and when what the Federal Reserve (Fed) does today might not be fully felt for dozens of months into the future.

Inflation Outlook: Clear as Mud

At his July 22, 2022, press conference, Federal Reserve (Fed) Chair Powell said that over the coming months, the Fed “will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2%.” Is there clear, convincing, or compelling evidence that inflation is headed that way? Not yet. The outlook is still as clear as mud. Let’s look at a few factors that inform our outlook on inflation.

Federal Reserve: Under Pressure

In August 2020, the Federal Reserve (Fed) laid out its objective of flexible average inflation targeting. At the time, the trailing one-year rate of inflation was 1.3% and the trailing five-year rate was 1.7%. After years of undershooting its inflation target, the Fed said it wanted to overshoot its target to bring the average rate of inflation up to target.