Has Inflation Peaked?

April 12, 2022

In March, U.S. inflation rose 8.5% year over year and 1.2% from February.  Half of the month over month gain was due to gasoline prices, which have fallen in recent weeks most likely due to the Biden administrations release of oil reserves (the largest in history) and the lockdown in Shanghai over the surge in Covid-19 cases. 

8.5% is a breathtaking number and it may be that this will be the peak for a few reasons.  The first is simple supply and demand – as prices increase consumers will either cut back demand for products and services or substitute less costly items (pot roast instead of surf and turf anyone?).  The second major reason inflation may be peaking is that America continues to add workers in large numbers, which should start to reduce the number of supply chain issues.  Global supply chain constraints are most likely with us for a longer period of time, which is why many economists believe inflation will stay elevated for the rest of the year.

Higher inflation generally leads to higher interest rates as the Federal Reserve raises rates to keep inflation in check.  Rising interest rates tend to impact the markets in different ways.  Growth stocks may underperform, as borrowing costs rise.  Value stocks could outperform as many of those stocks do well when interest rates rise (think financials and energy).  Bonds, especially long duration bonds, perform poorly due to the inverse relationship of the value of bonds to interest rates – when rates go up the value of bonds goes down and the longer the duration of the bond the more it declines in value.

We believe rates need to move quite a bit higher to have a large impact on stock prices, especially since earnings appear to have been holding up quite well.  We will learn more over the next month as earnings season kicks off this week to see how corporate earnings are holding up in the face of rising wages and rising interest rates.

Volatility in the stock and bond markets will likely increase this year, however a balanced portfolio that includes growth and value stocks and short and intermediate term bonds should reduce downside risk.  Please feel welcome to contact our office if you have any questions regarding the impact of inflation and interest rates on your portfolio.

Our recommendation is to reduce the amount of time you are spending online and watching the news and get out and enjoy Spring instead. In Minnesota the ice is starting to go out on the lakes, indicating that summer is in view.

The Bond&Devick Team