The current economic climate is facing higher inflation than previously expected, as indicated by increases in both the Producer Price Index (PPI) and Consumer Price Index (CPI). PPI indicates the cost of production from a producer standpoint while CPI reflects cost of living for consumers. On October 12th, CPI was reported to rise 0.4% on the month, above 0.3% forecast. The PPI increased 0.5% for September, against the estimated 0.3% rise. Several factors are contributing to this inflationary trend, including the persistent high cost of oil due to OPEC’s supply restriction and corporate consolidations in the oil sector, ongoing labor strikes, and a highly competitive job market. Federal Reserve Chairman Powell, in his address on October 19th, offered limited insight into the Fed’s outlook, but highlighted prevailing uncertainties. Due to elevated inflation, Powell hinted at the possibility of maintaining the current interest rate of 5.25% - 5.50% at the November 1st meeting further extending the period of high interest rates. The Federal Reserve, adopting a cautious stance, is prepared to reassess the situation during their meeting on December 13th if necessary.
Adding to the complexity is the ongoing conflict in the Middle East. A seminar hosted by Fidelity (script available in the source section) emphasized a probable escalation of tensions between Israel and Palestine due to the decisive determination of removing Hamas-controlled Gaza. The problem is rooted in the complex territorial landscape of Gaza. Twenty-five-mile land encompassing 2 million people, operates on two distinct levels. The first is the visible, densely populated urban area that exists on the surface. The second is the "subterranean" Gaza, an underground region primarily utilized for weapon manufacturing. Since the area is heavily urbanized, this possess a challenge to the Israeli army when it comes to deterring terroristic group while preserving lives of all civilians. An escalation is said to cause supply chain disturbance causing the oil prices to increase back to September levels. On October 19th, oil prices saw a moderate increase of 2.47%. With the situation evolving, a short-term gradual uptrend is anticipated within the industry.
Despite losing their relevance, the monthlong auto strikes are continuing with union demand for substantial pay and benefits. Although production and revenues are impacted, a resolution is anticipated once demands are met, marking a pathway to recovery.
Overall, the Federal Reserve is exercising caution. The risk of over-tightening is balanced with the need for inflation control. The Fed is likely awaiting October's CPI and PPI data to gain clearer insights into inflation trends. Despite energy market fluctuation, there is a promising sign in real estate. With the 10-year note yield above median cap rate, bonds offer more attractive returns. This gives an opportunity for investors to reallocate assets and “meet” the supply of bonds thus creating an equilibrium in which supply equals demand. This would bolster confidence in government fiscal policy and economic stability, potentially eliminating the need to raise interest rates.
However, at Traditions Wealth Advisors we have diversified your portfolios well to buffer against inflation and protect against geo-political events like Israel and Ukraine.