Don’t let the market’s gut reaction fool you…
As Chaikin Analytics founder Marc Chaikin explained yesterday, the Consumer Price Index (“CPI”) update for October was better than expected. And stocks ripped higher on the news.
Sure, the latest inflation numbers beat expectations. But they still weren’t good.
That’s a big problem…
You see, the Federal Reserve’s target inflation rate is 2%. However, even after last week’s good first step, inflation still sits at 7.7% year over year.
So now, the real question is… what does all of this mean going forward?
Let’s take a closer look…
First, we need to know what actually happened with inflation in the most recent report…
The media makes the story about a single number – the overall CPI. That number represents the average increase in price of all items bought since last year (or last month).
But you can also look at all the items individually…
For example, the cost of fuel oil jumped about 20% over the past month alone. It’s up almost 70% in the past year. The cost of food was up about 11% in the past year. And shelter costs were up around 7% in that same period.
These numbers are all part of the overall CPI. And you can see that it gets complicated quickly. That’s why the media tries to focus on a single takeaway.
With that in mind, here are the basics we need to know…
These numbers show that we’ve taken a step in the right direction.
However, as I said a couple of weeks ago, investors are running on “hopium” right now. They’re tired of bad news. So they’re latching onto every little piece of good news.
It’s great that inflation rose less than expected in October. That’s why investors got excited.
But now, we need to pay attention to what happens next…
If the CPI rises next month, watch out. That would likely cause the market to crash in a similar amount to its roughly 6% jump over the final two trading days last week.
Consumer sentiment is a critical indicator to watch, too. If it crashes and demand for goods also drops, that could signal that we’re headed into a deeper recession.
A third factor is worth watching as well. It’s something my colleague Pete Carmasino first pointed out a couple of months ago…
Until a sustained drop in inflation occurs, the Fed can’t afford to stop hiking interest rates.
The next CPI release is scheduled for December 13. And importantly, the Fed’s regularly scheduled meeting about interest rates will happen the next day.
With where inflation is right now, the Fed can’t afford to not raise the federal funds rate again. As we said earlier, it’s about five percentage points higher than the Fed’s target.
Now, let’s say the inflation numbers come in higher in November. It would indicate that October’s reading was just a fluke. And you can guess what would happen in that case…
The Fed would raise interest rates.
So short of massive disinflation next month, the Fed’s next step is pretty clear. And it looks a lot like all the recent steps…
The Fed is going to raise rates again in December.
By now, you know that’s not good news for stocks. And it means volatility will continue.
Good investing,
Karina Kovalcik
Editor’s note: Even in a best-case scenario, we’re likely still facing at least a few more rocky months in the markets. And things could get even worse than you might imagine…
In fact, Marc Chaikin believes a major shift in the U.S. financial system could lead to a run on the banks in 2023. If you want to avoid disaster, you need to start preparing right now…
That’s why Marc is hosting a special online event this morning. It will get underway at 10 a.m. Eastern time. That’s a little more than an hour from now. Save your seat right here.
