💸😎 Inflation Cooling. Making Progress.
Happy Sunday all,
Lately, I’ve been reading a book on strategies for taxable investing - as in, what are the most optimal ways to build wealth given that the average investor needs to pay taxes? I plan to summarize the book in a future newsletter and give you the important takeaways - so be on the lookout for that.
In today’s newsletter, we see Inflation cooling slightly to 5% year over year. The current Fed Funds rate or interest rate is between 4.75% - 5.00%.
That means interest rates are almost greater than inflation rates, and in general, positive real interest rates (when interest rates > inflation) can help to decrease inflation.
When interest rates are higher than the inflation rate, it becomes more expensive for individuals and small businesses to borrow money, which can slow down economic activity and reduce demand for goods and services. Historically we have usually seen that when there are positive real interest rates, inflation does tune downward slightly. It doesn’t necessarily guarantee a decrease in inflation, however. Still, I think interest rates will remain elevated for at least the next year or so.
According to the CME FedWatch Tool, 83.4% of traders are pricing in a raise of interest rates to the 5.00 - 5.25% level for the May 3rd FOMC meeting. By November 1st, the traders are pricing in a 4.50-4.75% level We’ll keep an eye on it and report on changes in the future.
Market Report
Inflation cooled in March as the Federal Reserve's interest rate increases showed more impact, with the consumer price index (CPI) rising 0.1% for the month, and 5% year-over-year, both below estimates. Excluding food and energy, the core CPI increased 0.4% monthly and 5.6% annually, both as expected. While inflation remains above the Fed's 2% target, it continues to show signs of decelerating. A drop in energy costs yet again helped keep inflation in check, while shelter costs rose at the slowest pace since November.
Rent inflation appears to be gradually decreasing, as the month-over-month pace of rent growth fell to 0.5% in March, compared to 0.8% during the second half of 2022. Even though annual rent prices are still relatively high, with a 9% increase in March compared to last year, the highest since 1981, the slowing monthly growth rates are promising
The shelter component is extremely important for inflation indicators, as it accounts for 40% of CPI and has significantly contributed to persistent inflation. However, data from sources such as Zillow and RealPage indicates that rent increases may have peaked in February or March 2022, suggesting a moderation in rent and overall inflation moving forward.
Federal Reserve officials are expected to continue their series of interest rate hikes when they meet next month, despite the threat of a potential recession. Although Fed staff advisers have already projected a "mild recession" later this year, they still believe that "some additional policy firming may be appropriate."
The most recent quarterly forecasts from the Fed suggest that rates may reach 5.1% this year, indicating one more quarter-point hike in May and then a pause. However, the rate path may not be fully settled due to uncertainty around the impact of credit tightening on the economy. Some officials have suggested that a pull-back in lending could help restrain growth and tame price increases, although the effects are highly uncertain.
The American Bankers Associations’ credit conditions index is near record levels and small business loan availability has worsened to levels not seen since ‘08.
Forecast Ahead: Earnings Kickoff!
Big Number: $300,000 is the new $100,000??
In New York, San Francisco, and Honolulu, $300,000 adjusted for the local cost of living is actually $100,000. Residents of the country’s priciest cities, contending with insane housing costs and other mounting expenses, need a net income of over $180,000 for their purchasing power to break the $100,000 mark, according to SmartAsset’s analysis of the Council for Community and Economic Research’s cost-of-living data. And since high-earners are taxed upwards of 40% in those cities, they need to command top dollar for their take-home pay to actually feel like six figures.
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nice one, really interesting and well written