A topic we have been discussing in our meetings is the concept of year-over-year inflation. Near the middle of each month, all eyes have been glued to the monthly CPI (Consumer Price Index) and inflation number. At one point earlier last year, inflation was reported near 10%. If you are receiving Social Security, you may have noticed an 8.7% increase or cost of living adjustment (COLA) to keep up with inflation. As of late, inflation is being reported at 6.5% to 6.7%, depending on the report. If the Federal Reserve’s goal is to get inflation back to 2 to 3%, how do we get there?
How is “Year-Over-Year” Inflation Calculated?
To simplify this calculation, add up the numbers below in the chart, and you will have the year-over-year total inflation number from December 2021 to December 2022. The total is 6.7%.
You can see in the chart, there are some higher numbers earlier in the year and more recently some lower monthly inflation numbers. As each month goes by, there will be a new year-over-year number.
If the economy continues this lower trend each month, inflation should continue to move down. Once we get to July of 2023, and the numbers are added up from July of 2022 to July of 2023, we could very well be closer to a historical year-over-year inflation number of 2 to 3%. Inflation doesn’t even need to go down (like it did in Dec 2022 above), it just needs to increase at a smaller pace.
If this continues to play out, stocks have a better chance of rising sooner vs. later.
Could things reverse course and inflation move up higher than expected? Absolutely. That is why the Fed continues to raise rates, potentially at a slower pace. We will find out on February 1st, which is the first of eight meetings the Fed will hold over the year.
Sources:
Fed Calendar link https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm
https://www.statista.com/statistics/216037/monthly-percentage-of-change-in-the-cpi-u-in-the-us/
https://tradingeconomics.com/united-states/inflation-rate-mom