Where the CPI Comes From

Last week was a busy one for the markets. The S&P 500 had its sixth weekly loss in a row on lots of news and volatile trading. Stocks snapped back a bit as the week ended, which is encouraging, and futures are brighter as I write this morning. The crypto space suffered a thwacking last week as well after a highly-speculative-but-marketed-as-safe “stable coin” basically bit the dust. Bitcoin, the comparatively stodgy digital asset, got hit as well but has since found its feet. And the much-maligned bond market finally picked up some slack by staying positive when stocks were down.

Also last week we learned that inflation rose at an annualized rate of 8.3% in April. This is slightly slower than the 8.5% Consumer Price Index in March. Energy, apparel, and used vehicle costs declined during the month, but everything else tracked by the Bureau of Labor Statistics was higher on average. 

The CPI numbers move markets and are upsetting for many, so it’s helpful to get a better understanding of how they’re derived. There’s a bunch of reading material on the BLS’s website and I’ve copied some below as a summary. Additionally, there was a great piece from The Wall Street Journal last week covering BLS staff who go into the field to collect data. I’ve copied some parts from that article as well and a link is below if you’d like to read more.

Assorted information from the BLS [notes and emphasis mine] –

The CPI is widely used as a cost-of-living index, which answers the hypothetical question concerning what expenditure level is needed to achieve a standard of living attained in a base period at current market prices. [In other words, the CPI is trying to approximate how a typical person’s cost of living changes over time. The BLS doesn’t know the value of your time, your personal buying habits, or the substitutions you make as prices rise. This is part of the reason why people often feel like their personal inflation rate is much higher.]

The CPI focuses on the consumer experience of inflation, therefore the price sought is typically the consumer's out-of-pocket price, including sales and excise taxes.

The CPI is calculated in a two-stage process. First, basic indexes are calculated; these are indexes for specific item-area combinations. Ice cream and related products in the Chicago-Naperville-Elgin metro area are an example. These are structured by item category and geographic location. In the second stage, the basic indexes are aggregated into broader indexes, all the way up to the all items U.S. city average index. Thus, the CPI has both a geographic structure and an item structure.

Expenditure items are classified in the CPI into more than 200 categories, arranged into 8 major groups [that are unique to the CPI calculation process].

Eight major groups and examples of categories in each follow:

  • Food and beverages (breakfast cereal, milk, coffee, chicken, wine, full-service meals, snacks)
  • Housing (rent of primary residence, owners' equivalent rent [roughly what a homeowner would pay to rent their own home], utilities, bedroom furniture)
  • Apparel (men's shirts and sweaters, women's dresses, baby clothes, shoes, jewelry)
  • Transportation (new vehicles, airline fares, gasoline, motor vehicle insurance)
  • Medical care (prescription drugs, medical equipment and supplies, physicians' services, eyeglasses and eye care, hospital services)
  • Recreation (televisions, toys, pets and pet products, sports equipment, park and museum admissions)
  • Education and communication (college tuition, postage, telephone services, computer software and accessories)
  • Other goods and services (tobacco and smoking products, haircuts and other personal services, funeral expenses) 

[CPI] directly affects the income of almost 80 million people. Social Security benefits as well as military and Federal Civil Service pension payments are indexed to the CPI. In the private sector, many collective bargaining agreements tie automatic wage increases to the CPI and some private firms and individuals use the index to keep rents, alimony, and child support payments in line with changing prices.

Additionally, for analytical purposes, the CPI is also divided into food, energy, and all items less food and energy. The CPI for all items less food and energy gets considerable attention as a measure of underlying "core" inflation, which is not subject to the volatile movements of food and energy prices.

Now from the recent WSJ article –

READING, Pa.—Emily Mascitis has one of the most important jobs you never knew existed.  

As Americans’ monthly bills climb at the fastest rate in four decades, it is Ms. Mascitis’s work that confirms the $9 you just paid for a 4-pound bag of clementines isn’t an anomaly. 

Ms. Mascitis is an on-the-ground economist with the Bureau of Labor Statistics, one of 477 workers employed by the federal government to track changing prices for hundreds of thousands of goods and services every month. The culmination of their work is the Consumer Price Index, which moves markets and monetary policy and charts changes in the cost of living for millions of people. 

A typical day on the job might take Ms. Mascitis to a beauty salon to check the price of a blowout, to a jeweler to see what a strand of pearls costs and a funeral parlor to learn what it is charging for cremation services. It also gives her a front-line view on how broad economic forces ripple in the real world.

Prepandemic and before the rise in inflation, store managers—along with Ms. Mascitis’s own family and friends—didn’t take much interest in the numbers she was collecting.

Now, she says a grocery store or mechanic visit can take an extra 10 minutes as business owners complain to her about rising prices. Her husband looks to her for help cutting costs to feed and clothe their 10-person household. (Ms. Mascitis, a mother of six, is trying to curb her family clementine obsession: “We need to pick a less expensive fruit.”) Her friends ask for the inside scoop into the next BLS reading—something she can’t disclose under any circumstances as confidentiality is one of the core elements of an on-the-ground economist’s job.

Ms. Mascitis, 50, who has been working as a BLS price checker since 2013, describes her job as “a treasure hunt.”

Participation in the CPI is voluntary for businesses, so having a rapport with individual company owners helps, Ms. Mascitis says. As a branch chief, she helps recruit new small businesses as well as corporations to be part of the index. She also oversees 10 employees. 

The job of a price-checker is exacting. To price an item, workers go through an up to 11-page list of data points to make sure they are pricing the same item they did the prior month. A can of soup has 12 different specifications, including flavor, size, brand, organic labeling, material of the packaging and dietary features, such as sodium content. 

At a grocery store outside Reading, Pa., Ms. Mascitis introduces herself to the night manager and heads to the soup aisle to price a can of chicken noodle. She double checks to make sure it is the exact item she is supposed to record—If not, she could skew the accuracy of the entire index or make her data point unusable. 

“Do you see what I just did? I almost just ruined the whole thing,” she says, pointing to a teeny “low sodium” label on the can.

Next Ms. Mascitis heads to the frozen foods aisle, hunting for a noodle dinner. After rifling in the freezer, she resolves to ask the manager whether it is out of stock and says she will return. 

Supply-chain shortages have made it more difficult to check prices from month to month over the pandemic, since goods are often out of stock, Ms. Mascitis says. During the visit, an announcement over the grocery-store PA asked shoppers to be patient as the store deals with limited supply.

Crouching down to price a bag of potato chips, Ms. Mascitis notices a trend she has been seeing a lot of recently: shrinkage. The price of the chips has stayed the same but the contents of the bag have shrunk, from 12 to 11 oz. 

“That is called shrink-flation, and it’s sneaky because the consumer doesn’t always pick up on that,” Ms. Mascitis says.  

The BLS tracks prices for up to 100,000 goods and services, and 8,000 housing units every month. The agency decides which items to price using census-collected data on buying habits, making sure the measurements reflect the way Americans spend their money and rotating items out after four years.

Here’s the link to the portion of the BLS website and the org’s “Handbook of Methods”.

https://www.bls.gov/opub/hom/cpi/concepts.htm

And here’s a link to the WSJ article.

https://www.wsj.com/articles/inflation-bls-price-checkers-who-determine-cpi-11652132333?mod=hp_lead_pos8

Have questions? Ask me. I can help.

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Good News, Bad News

If nothing else, recent market volatility confirms what we should know all the time but tend to forget: being a long-term investor is never easy for long. We’ll have bouts of calm when prices only seem to rise amid low volatility and investors are happy and feel assured that the good times will last forever. And then wham, the tide turns, and it seems as if everything that was positive is now negative and the sky falls a little more each day. It’s human psychology meeting fast-moving markets and the whipsawing from positive to negative sentiment has only gotten more pronounced lately.

Case in point is the recent survey from the American Association of Individual Investors (AAII). There are a variety of sentiment surveys out there, but AAII’s is watched closely because it’s members are primarily regular people (not investment professionals) trying to manage their own portfolios with educational help from the organization. They’re surveyed weekly to see how bullish, bearish, or neutral they are, and where they see the markets six months out. It’s a here-and-now sort of survey and a good way to check the mood of individual investors. Survey history goes back to the late 80’s. The results are interesting because, so far as the “pros” look at it, spikes in the survey results are seen as a contrarian indicator to buy or sell. (Recall how the professional side of the markets refers to ordinary mortals as the dumb money while the pros, of course, are the smart money – sort of rude and condescending, yes, but generally accurate from a historical perspective.)

Last week AAII members reported being incredibly bearish, as shown in the charts below from Bespoke Investment Group and AAII. This was the lowest survey result since the March 2009 market lows of the Great Financial Crisis. The stock market was performing much, much worse back then, and there was real risk of the economy, and even the global financial system, coming apart at the seams. Yes, our current situation is different, but I still scratch my head a bit looking at a chart like this. As I’ve mentioned before, one explanation for this sort of bearishness showing up now could be the cumulative weight of recent events capping off the last couple of years, leading many to the point of mental exhaustion. So it’s understandable that lots of investors are in full-blown crisis mode. If so, I get it. I feel it myself some days.

 

Investor mood is especially important right now because we have the Fed meeting this week to announce its next move on short-term interest rates. As we discussed last week, investors are expecting a half-point rate bump, and this (plus more increases in the coming months) is already priced into bonds and stocks. The benchmark 10yr Treasury hit 3% yesterday for the first time in several years and parts of the yield curve are toying with inversion.

And now the Fed will be making its rate decision on the heels of the official estimate of GDP for the first quarter showing a contraction. (I italicized here because GDP estimates get revised several times in the months following their initial release – they’re imprecise but still move markets.) It was a good news, bad news kind of report. Some aspects of the GDP numbers were positive while others were negative, such as inventory and trade sectors, issues still emanating from pandemic-related shutdowns and intense government spending. How the Fed reconciles all this with 40-year-high inflation and reeling financial markets, and how they couch their decision this week, will all be important to watch.

So are almost 60% of AAII members right that stock prices will be lower in six months? Or is their extreme bearishness overdone and a sign of better times to come, a “dumb money indicator” that the pros love to crow about? Only time will tell, but if past is prologue we could (hopefully) soon be seeing the lows for this correction.

If so, it doesn’t necessarily mean the low was last Friday, or that it won’t be tomorrow or weeks from now, just that as more investors reach the point of ultimate capitulation, we’ll get closer to a bottom as willing buyers step in. We saw this in the last hour or so of trading yesterday when the institutional algorithms started buying and turned a downer of a day into a positive close. This should serve as a reminder that there are still lots of buyers out there looking to take advantage of sellers, and that’s the way markets are supposed to work.

Here's a link to the AAII survey site if you’d like to check that out.

https://www.aaii.com/sentimentsurvey

And here’s a link to Bespoke’s site if you’d like to poke around there as well. I’m an “institutional” subscriber but you can read their blog and follow them on the socials for free. Their analysis, while definitely geared toward professionals, is exceptional.

https://www.bespokepremium.com/

Have questions? Ask me. I can help.

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A Quick Bond Update

This week let’s look at an article about the bond market from Kathy Jones, head fixed income strategist at Schwab. Ms. Jones does a good job explaining what’s been happening with bonds, where we are now, and maybe some silver linings. A general understanding of this is important because it helps us understand why performance has been suffering, and because the bond market acts as a gauge on recession risk.

Here are some snippets [with notes added by me] and a link to the entire article is provided below.

The bond market has priced in a fast, steep tightening cycle by the Fed.

A lot has changed in the past few months—mainly the Federal Reserve's policy stance. Until December, the Fed was focused on the potential negative economic fallout from the pandemic and was cautious about exiting its very easy policy stance. The stronger-than-expected recovery, along with the spike in commodity prices due to Russia's invasion of Ukraine, forced the Fed and other central banks to shift toward tighter policy. Consequently, yields jumped across the curve, led by a steep rise in short-term rates. [The following chart is only through 4/4 but the shape is roughly the same today. It also illustrates a key point: bond investors are focused on this short-term 2-3yr timeframe as riskiest while being fairly sanguine about the longer-term outlook.]

 Yield curve signals.

The market is now discounting a fast pace of Fed rate hikes, with the federal funds rate expected to reach as high as 3% in early 2023 [up from 0.5% currently]. Considering that the Fed has only raised rates once, a lot of future rate hikes are already being discounted by the market. [As of this writing the bond market is pricing in a 90%+ chance of a half-point increase by the Fed at its next meeting in May.] It's important to note however, that the market is also discounting a few rate cuts in 2024. 

Yields are now converging between two-year to 10-year maturities. They are currently above the Fed's longer-run estimate of the "neutral rate" of about 2.5%—the rate that is low enough to support economic growth but high enough to keep inflation in check. In past cycles, when the yield curve flattens near the neutral rate, it has been near the peak in long-term rates.

In the past few weeks, parts of the Treasury yield have inverted. Ten-year yields are lower than five-year yields, and the much-watched two-year/10-year yield spread dipped into negative territory briefly. Yield curve inversions raise concerns because they have historically preceded recessions. [We discussed this recently and the 2yr/10yr curve that’s popular to watch as a recession indicator actually “unverted” pretty quickly after inverting. The 7yr/10yr curve is very tight, inverting and unverting as I write, but this particular combo isn’t seen as an important indicator. I’ll be watching closely in the weeks ahead to see if another inversion of the 2yr/10yr occurs and if it sticks. Here’s a yield curve chart from The Wall Street Journal so you can see where we’re at now. You’d see the inversion as the blue line dipping between points, whereas from 5yrs out it looks pretty flat.]

What about inflation?

The biggest concern for fixed income investors is inflation. Although it's likely to remain high in the near term due to rising commodity prices, we expect it to ease later in the year—providing some relief for bond investors. The economy is showing signs of cooling off after a sharp rebound from pandemic lows. It appears that a lot of consumption was likely pulled forward by the combination of easy fiscal and monetary policies last year. Now the pace is moderating, especially in key areas where in financing costs are rising—like capital expenditures and housing. 

The housing market is feeling the pinch of higher interest rates. Mortgage applications for purchases and refinancings have dropped sharply and new home sales have fallen from peak levels of 2021. It appears that the housing boom may be over. Since a lot of consumption has been tied to the housing market, the slowdown is significant. [I don’t think she’s implying that a housing market crash is imminent, just that the slowdown of double-digit year-over-year gains in house prices has likely already begun. But this is a national average. I’m still hearing stories of multiple all-cash/over-asking offers on homes in geographically dispersed markets.]

Long-term inflation expectations have increased only modestly.

You wouldn't know it from reading the financial news or listening to the most hawkish central bankers, but inflation expectations appear reasonably contained. The markets are discounting high inflation in the near term, but also an aggressive tightening cycle that will pull it lower longer term. 

The University of Michigan consumer sentiment survey indicated that near-term inflation expectations are high and continue to rise. Not surprisingly, short-term inflation expectations tend to be highly correlated with oil and gasoline prices. However, despite the steep rise in prices recently, five-to-10-year inflation expectations are sitting at 3%, which happens to be the long-term average dating back to the 1990s. In other words, consumers don't expect this inflation spike to last at the elevated rates we've seen recently. [Now look again at the bar chart above to clearly see how this thinking has impacted the bond market.]

Opportunities for income.

We are finally getting positive on the outlook for intermediate to long-term bonds. After spending the better part of the past few years suggesting investors keep average portfolio duration low due to the risk of rising yields, we are now in favor of adding duration (that is, some slightly longer-term bonds), and selective credit risk. What changed? Yields and the stance of Fed policy. 

The risk/reward has improved now that yields have jumped up and the signs from the yield curve suggest the peak in yields for the cycle may be getting closer. There may be some more upside in yields if inflation proves more stubborn than we expect, but with the Fed all-in on bringing it down and the curve flattening, the collective wisdom of the market is suggesting that yields are likely to plateau or move down.

[As I’ve mentioned a few times in recent weeks, the bond market may be overly pessimistic, so a “plateau” sometime soon would be welcome. Core bonds are down approaching 9% year-to-date, underperforming the S&P 500 if you can believe that. Just plain painful for conservative investors. But, as the article suggests, cash flow from bonds should rise over time and that will help.]

Here’s the link to the full article.

https://www.schwab.com/resource-center/insights/content/last-income-fixed-income-market?cmp=em-QYD

Have questions? Ask me. I can help.

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Notes on Rates

Well, last Wednesday was a big day for the markets as the Fed Chair was having his presser to discuss Fed policy and their outlook. Investor mood turned ebullient for a few hours, but the markets have corrected that and then some since. One step up and two steps back. It reminds me of Springsteen and races I’ve run up steep slopes after a hard rain, each step seeming oh-so-futile until, eventually, but I digress…

Since interest rates are all the rage right now, let’s spend a few minutes reviewing where we stand with three rate benchmarks and what’s expected by year-end.

Fed Funds Rate – 0.75% to 1% currently, 2.8% expected

This is the interest rate range at which banks and credit unions lend to themselves to meet reserve requirements, typically via overnight loans. The reserve requirements are set by the Federal Reserve and then the Federal Open Market Committee (a smaller group within the Fed) usually meets eight times a year to set the rate range. Higher rates are meant to slow the flow of money in the system, while the opposite is true for lower rates. “Fed funds”, in a sense, is the axis around which the financial world spins.

Fed funds was lowered to essentially zero during the Great Financial Crisis and the FOMC didn’t start raising it until late-2015. From there the rate was being raised incrementally to about 2.5% as we entered 2020. Then the FOMC again took the rate back to zero when covid hit and it’s taken until now for them to start raising.

Prime Rate – 4% currently, 5.8% expected

We read about the fed funds rate and how it moves markets, yet we’re more impacted by the prime rate day-to-day in the real economy.

Prime is an average interest rate compiled by the Wall Street Journal after surveying our largest banks. It’s thought of as the lowest rate offered by these banks and is typically 3% higher than fed funds. Pre-pandemic, the prime rate was 5.5% since fed funds was at 2.5%. Then it spent many months at 3.25% because the fed funds rate range was 0% - 0.25%. Now we’re back up to 1% for fed funds and a 4% prime rate, that same 3% spread. (I don’t know why it’s a 3% spread, because it doesn’t have to be so far as I’m aware; it just seems generally agreed to in the “modern” era. If you know the history, please enlighten me.)

Here's a chart from the St. Louis branch of the Fed that shows the relationship between fed funds and the prime rate over time.

From there it’s all about the spread you pay over prime. Maybe competition makes this smaller for some customers, or maybe a promo rate is less than prime, but currently the direction is higher for all. Investors are expecting the fed funds rate to hit 2.8% by year-end. If so, prime should then be at 5.8% and may continue rising into next year. Still historically low but a big change in a short time.

All this makes new borrowing more expensive than it was even just a few months ago, and impacts auto loans and credit cards, for example. Auto loan rates are about 4.5% nationally, below a pre-pandemic high of about 5%, but still a good deal more than last year. Credit card rates, at least on average, haven’t moved substantially higher yet, but are still north of 16%, according to Bankrate.com.

Prime also impacts some adjustable-rate mortgages and equity lines of credit. There are a variety of so-called reference rates besides prime, but they’re all moving in the same direction. If you have an ARM or a HELOC you should look at your loan paperwork to see what your reference rate is and how often your lender can increase your payment. Most ARMs have a cap for annual increases, which is great since we’re looking at a potential 2+% increase just this year.

10yr Treasury – 3.1% currently and maybe 3.2% expected by year-end (This is driven entirely by markets whereas the prior two benchmarks are set by people at the Fed and big banks.)

Another key benchmark for rates on longer-term loans is the yield on 10yr Treasury securities, wrapped up into something known as the Constant Maturity Treasury. Published by the Fed, the CMT is an average of yields on publicly-traded Treasurys with a 10yr maturity (and it’s published for different timeframes as well). The 10yr CMT doesn’t set mortgage rates but, instead, reflects the market that mortgage bonds have to compete in. Since the overwhelming majority of mortgages are packaged into bonds and sold to investors, the rates paid by borrowers have to keep up.

The 10yr CMT is now just over 3%, following the yield of the 10yr Treasury. That brings the average 30yr fixed mortgage rate to 5.6%, according to the Wall Street Journal, up from 3% or less a year ago. That adds about $122 per month on the principal and interest portion for every $100,000 borrowed. That has to hurt homebuyers who have been diligently bidding on, and often getting outbid on, homes as they watch rates rise in a seller’s market.

So what to make of all this?

Now is a great time to reevaluate your debts. Your fixed-rate mortgage from a purchase or refinance at pretty much any time before this year is going to be in good shape rate-wise. You typically need to save at least half a percent when refinancing to make the costs pencil out, so any rate below 5% is probably locked in at this point.

The same thinking applies to car loans of maybe 4% or below.

Credit cards – you’re not carrying a balance on credit cards are you? If so, and even though average rates on consumer credit haven’t moved a lot higher yet, they’re expected to, so you’ll want to get balances paid off as quickly as possible before that debt gets even more expensive.

Beyond that, and maybe a little bit in the weeds for this post, is to think seriously about taking money out of bonds to buy down (or pay in full) mortgages or other debts with higher interest rates. Longer-term expected returns on core bonds are a little over 3%, so it’s hard to justify borrowing for years at 5+% if you have bonds in non-retirement accounts. This is a facts-and-circumstances sort of thing but is definitely worth considering.

Have questions? Ask me. I can help.

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Unhappy Coincidence

Last week ended with a very odd coincidence – stocks, as measured by the S&P 500 and bonds, as measured by the Barclays Aggregate Bond Index, were each down about 10% year-to-date. And that’s for the typical “large cap” stock and “core” bond. Peel back the layers to look at the most growth-oriented stock sectors and longer-term bonds and those assets are close to being down 20% this year. Your average investor doesn’t hang their hat on long-term bonds but still, 20% is a big slide for anything.

The mood in the markets is downright nasty, no way to sugarcoat it. This is unfortunate to say the least given that, from an economic perspective, the consumer is still in decent shape and is actively spending if perhaps not as aggressively as last year. Businesses large and small continue to report good sales numbers (even the airlines are expecting to be profitable this quarter!). And jobs appear to be plentiful. The “headline” unemployment rate, total of those unemployed, and new claims for unemployment are all near pre-pandemic levels. In a perfect world we’d be geared up for more expansion, so why the sudden turn in the markets? One answer is that the stock and bond markets are forward-looking and people (those who run businesses and those who buy from them) across the economy report feeling great about their situation today but express growing pessimism about the future, and that leads short-termers in the market to sell.

There are lots of reasons for this pessimism, from the psychological and the practical to the political, but the biggie is obviously inflation. Last month’s official inflation number was 8.5% and most would agree it’s higher in the real world (or at least it feels that way). According to the Bureau of Labor Statistics, rising gasoline prices made up over half of the headline inflation number. Increased housing costs was also a major contributor. Just about everything we buy costs more now, except for maybe used cars and trucks, at least as of last month. This is unsettling for obvious reasons and absolutely impacts investment decisions.

And now we can add expectations for aggressive Fed policy to the mix. Investors have reacted to this by selling stocks in sectors deemed most sensitive to rising rates and driving down bond prices to adjust to expected rate increases from the Fed. For example, the 2yr Treasury yielded 0.16% a year ago Friday, but investors have sold bonds to the point where the 2yr yield ended last week at 2.72% (now about 2.55% as of this morning). That’s a huge change in the bond world, due entirely to expectations about Fed policy.

As I’ve mentioned before, bond investors might be getting ahead of themselves here, but overt pessimism continues. According to Bespoke Investment Group, investors are now pricing bonds for a 0.5% rate hike next month, 0.75% in June, and then another 0.5% in July. That would bring the Fed’s short-term benchmark rate to 2.25% this summer from 0.5% now. More rate increases are expected into next year, potentially bringing short-term rates up to nearly 4% in a very short period of time. The following two charts from Bespoke provide a nice visual of investor expectations and a historical comparison. If bond investors are right, this would be tied for the fastest 12-month increase in rates since 1989.

What’s an investor supposed to do about this? Frankly, there isn’t much to do other than ride it out and focus on portfolio structure. If you hold quality bonds in the proper proportions, don’t sell them unless you need to. And consider adding to bonds with extra cash in your portfolio, or rebalancing from stocks to bonds if that makes sense for your situation. You’ll incrementally earn higher yields, and this will help claw back some return.

Beyond that, you could look at adding some alternatives like we discussed in recent weeks. Just be careful to remember that even though prices are down right now, core bonds are referred to in that way because they’re an important part of your portfolio, especially if you’re close to retirement or are living off your savings. Don’t go too far afield while looking for silver bullets because, unfortunately, they don’t exist, no matter what the glossy brochures and infomercials might tell you.

Have questions? Ask me. I can help.

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Inflation Adjustments

Before I get to this week’s post I wanted to say a few words about the markets. Stocks have been grinding lower and it’s getting to be brutal in the bond market (although there’s a little relief for both as I write this Tuesday morning).

I think this is short-term and, unfortunately, there’s little to do about it in the meantime. Obviously you could sell everything and park it in the bank; that’s always an option. But one thing we know is that getting back in after you’ve gotten out is an extremely hard thing to do. That’s why we try to avoid it. Instead, ensure you own good quality stock and bond investments, and that you own them in the proper proportions. Fix problems in those areas if they exist. Otherwise, rebalance your allocation while embracing your inner-stoic. I wish there was a better or easier answer than that but there isn’t.

If I’m managing your portfolio I’m looking at it daily and making necessary adjustments. Even if I’m not managing things for you, let me know and we can find time to chat about strategy and tactics. For one thing, it’s a good time to put excess savings to work.

Okay, on to this week’s post…

“In spite of the cost of living, it’s still popular.” – Kathleen Norris

Are you sick of hearing about inflation yet? A recent survey found that 48% of American’s are thinking about inflation “all the time”. I hope that’s an exaggeration, but something tells me it’s not, or at least it’s not for a sizeable chunk of the population. After all, it’s one more thing outside of our control during tumultuous times. And if you go down the variety of internet rabbit holes on the topic of inflation you’re likely to come back jittery. Understandable, given that much of the “content” is trying to press your buttons, usually to sell you something. But it’s what you do next that matters.

As we’ve discussed before, inflation expectations can become a self-fulfilling prophecy as more consumers pull forward their future purchases in an attempt to save money. People tend to feel the need to do something about rising prices, even though we have no control over the prices themselves. For example, in large part due to the Russia/Ukraine issue, the USDA assumes “food at home” prices could rise another 6% by year-end, so buying extra of something you’d eventually buy soon anyway can make sense.

But we should be careful about feeling forced to buy things we might not need based on fear of rising prices. Remember that high prices today might not last longer-term; that’s what the bond market is currently telling us anyway. So instead of fear-based decision making, perhaps we should channel the need to do something into bringing more control, more intention, to our buying habits.

The following article from CNBC suggests some good ways to offset rising prices via modest lifestyle changes that are easily adjusted back to normal when we feel the time is right.

The same article and survey found that, on average, Americans are spending an extra $300 per month due to inflation. That’s probably equivalent to one or more utility bills and is just an average. Gas prices are up over 40% in the past year nationally and 50% in California, according to AAA. And in the last week or so average mortgage rates hit 5%, up from a very recent 3%. This alone adds $115 to a monthly payment for every $100,000 borrowed now. And in Sonoma County that’s what, maybe another $700 tacked onto a mortgage payment?

I’m also including an article from AARP about shrinkflation, the old trick manufacturers use of repackaging less while charging the same, or perhaps more, hitting consumers from both sides.

One thing I get a lot of satisfaction from doing (much to my family’s chagrin) is comparing “per unit” pricing information on the shelf label at the grocery store. I often look there before even looking at the item’s purchase price. It’s a quick and objective way to determine value between similar products and isn’t always about buying the lowest-priced item. And if you’ve been doing this for a while as I have, it’s easy to see which of your favorite brands is trying to gouge you through shrinkflation. (Yes, I’m fun to shop with…)

Here’s a link to the CNBC article referencing the survey.

https://www.cnbc.com/2022/04/05/inflation-fears-force-americans-to-rethink-financial-choices.html?utm_term=Autofeed&utm_medium=Social&utm_content=Main&utm_source=Twitter#Echobox=1649153205

Here’s the article about shrinkflation.

https://www.aarp.org/money/budgeting-saving/info-2022/shrinkflation-same-price-less-product.html

And here’s the article on stretching your food budget by comparing per unit pricing information at the grocery store.

https://www.morefood.org/unit-pricing/#:~:text=The%20price%20label%20on%20grocery,ounces%20%3D%20%240.10%2Founce).

Have questions? Ask me. I can help.

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