Key takeaways
Inflation is down considerably from its mid-2022 peak of over 9%.
The Consumer Price Index dropped to 2.4% for the 12 months ending in September, its lowest reading since February 2021.
Declining inflation convinced the Federal Reserve in September to initiate its first interest rate cut in more than four years.
The latest inflation report offered mixed results on America’s cost-of-living. For the 12-month period ending in September, inflation as measured by the Consumer Price Index (CPI) dropped to 2.4%, its lowest level since February 2021. However, costs rose 0.2% in September, equal to the prior two months, but higher than analysts anticipated. A sharp rise in food and transportation services costs contributed to September’s surprising inflation hike. 1
Just weeks prior to September’s CPI report (issued October 10, 2024), the Federal Reserve (Fed), for the first time since early 2020, initiated cuts to the federal funds target rate that affects financial institutions’ overnight lending rates and influences consumer products such as credit cards, automobile loans and mortgages.
“Fed policymakers chose to cut rates, recognizing that inflation was slowing, while the labor market appears to face more challenges,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “The pace and path of further interest rate cuts will likely be determined more by labor market trends than by inflation data.”
Inflation remains a Fed monetary policy consideration, but Haworth believes, “The Fed probably won’t hike rates even if inflation ticks higher, unless it really starts to accelerate.”
Over the past thirty years, living costs as measured by CPI have grown by an average of 2.6% per calendar year (it is now below that level). It remained below 4% per year until 2021, when inflation surged. It now stands at more historically typical levels. 2
The Fed targets 2% inflation, as measured by the annual change in the personal consumption expenditure (PCE) price index, a measure of spending on goods and services. 3 PCE was steady in August, with the headline PCE index at 2.2% for the previous 12 months. The narrower “core” PCE (excluding the volatile food and energy categories) rose slightly to 2.7% through August. 4 Both numbers remain above the Fed’s long-term 2% target.
“Fed policymakers chose to cut rates, recognizing that inflation was slowing, while the labor market appears to face more challenges,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “The pace and path of further interest rate cuts will likely be determined more by labor market trends than by inflation data.”
In September 2024, core inflation rose 3.3% for the previous 12-month period, up slightly from August’s 12-month average and well above the Fed’s 2% annual target. “The Fed would clearly like to see core inflation come down,” says Haworth.
While bond yields, over time, tend to track with inflation, yields on the benchmark 10-year U.S. Treasury note rose in the weeks since the Fed’s mid-September short-term interest rate cut. 10-year Treasury yields dropped to 3.65% on September 17, 2024, but recently exceeded 4%. “In the current environment, we believe this is close to what seems an appropriate yield on 10-year bonds,” says Haworth. “It appears to reaffirm the market’s general confidence that economic growth remains solid.”
Once inflation began to slow from its peak in mid-2022, stocks performed better. In 2024, the S&P 500 has repeatedly reached new record highs. The bond market continues to offer attractive yields for long-term investors, though lower than 2023’s peak levels. Although yields on some shorter-term securities exceed yields of some longer-term bonds, Haworth says investors should consider placing more emphasis on their long-term portfolio goals. “It’s an appropriate time to move money out of short-term vehicles and focus on positioning your portfolio in assets, such as stocks and longer-term bonds, that can help you achieve your ultimate financial objectives in the years to come.”
Generally, a consistent long-term strategy tends to work to the benefit of most investors. This likely precludes any dramatic changes to your asset allocation strategy in response to today’s capital market environment.
Be sure to talk with your financial professional about what steps may be most appropriate for your situation.
The inflation rate measures the change in living costs for the average consumer over a given period of time. While there are various measures of inflation, the one most followed is the Consumer Price Index (CPI), a measure of changes in the prices paid by urban consumers for a market basket of consumer goods and services. The inflation rate for the 12 months ending August 2024 (as measured by CPI) was 2.5%, down from a peak of 9.1% in mid-2022. August’s reading represented the lowest annual inflation rate since February 2021.1
Changes in living costs, reflected by inflation, represent a loss of purchasing power. This is an important consideration not only in your day-to-day living, but in your long-term financial planning. To improve your quality of life over time, you’ll want to see your income grow faster than the inflation rate. To retain your lifestyle in retirement, you want to be sure that income you receive from your own investments and other sources keeps pace with changes in living costs over the course of retirement. This is why inflation has such a significant impact on individuals.
The Federal Reserve, which is charged with maintaining stable prices, targets a long-term inflation rate of 2%. Between 2012 and 2020, the annual inflation rate was between 0.7% and 2.3%. Since that time, inflation has been much higher. It stood at 7.0% in 2021, 6.5% in 2022 and 3.4% in 2023. Through July 2024, inflation over the previous 12 months was 2.5%.4 Still, headline inflation remains above the Federal Reserve’s 2% target.5
Having reached new record highs 46 times so far this year, investors wonder if S&P 500 stocks still have room to climb higher.
The Federal Reserve has started easing monetary policy by cutting interest rates. Does this mean the threat of a recession has receded?
Equal Housing Lender. Deposit products are offered by U.S. Bank National Association. Member FDIC. Mortgage, Home Equity and Credit products are offered by U.S. Bank National Association. Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rates and program terms are subject to change without notice.
