U.S. Inflation Hits Four Decade High

To close out the financial year, the U.S. consumer price index rose 9.1% in June year-on-year. For those who don’t know, the U.S. consumer price index is a broad-based measure of the cost of living through related goods and services. While we are certainly used to higher inflation numbers coming out of the U.S., this was a full 30 basis points (bps) above the consensus estimate.

The main drivers of this surprise were once again in energy and food prices. Even if those prices were removed from the equation the consumer price index still rose 5.9%, 20bps above estimates. If we adjust for inflation, hourly wages fell 1% in June 2022, bringing the total down 3.6% year-on-year.

What does this mean for the markets? Well it means a rise in interest rates. This figure, combined with past comments by Fed Chair Jerome Powell, are likely to result in interest rates rising rapidly for the remainder of 2022. As we have seen already this year, higher interest rates mean the yield on lower risk assets, such as bonds, become more attractive, lowering the multiple placed on stocks. Additionally, higher interest rates increase the risk of a recession, when the economy in the U.S. is already wounded.

But all is not lost, and even in a recession, there are always stocks that outperform. For example, Dollar General ($DG) gained 61% in 2008. So whether you’re investing on Wall St or the ASX, research will always pay off.