As a consumer when you look around you can see some prices rising and when prices are rising the natural reaction is expecting your wages to rise, when that happens inflation is built into the system. It is normal, but the federal reserve or Fed can help mitigate the rise. Should they? when is the time to allow the markets to do its normal thing? We know some people have been working consistently since COVID, but there are millions who did not, what does the Fed do?
In an article by Kate Duguid of Reuters, the Fed is giving mixed messages because they know that inflation is a concern, but it is not time to release the actions to control inflation. Fed Chair Jay Powell has said he believes some of the price increases will go down because the supply chain will be better and the pent up demand will normalize.
One of the benchmarks to look towards how investors feel about inflation is the 5 year forward break-even inflation rate which tracks the expected rate of inflation in 5 years time. It was recently at 2.2% below the 7 year high of 2.4%
The personal consumption expenditures price index (PCE) the Fed’s preferred measure for inflation rose 3.6% in April from a year earlier.
Last August, the Fed adopted a flexible average inflation target (FAIT) that is designed to be somewhat more forgiving to price pressures that in the past. The FAIT helps the Fed worry about both maximum employment and stable prices.
Linking to dividend paying stocks, when inflation rises bond yields have to go higher, at the moment bond yields are lower than dividend yields. If that changes money will flow to the higher yields, particularly in the yields are being paid by the US Treasury or government bonds. The Fed Chair has not allowed that to happen and in August the Fed Reserve has an meeting at Jackson Hole, Wyoming which will have all Fed watches waiting to hear what they say and do. Till then the total return on dividend paying stocks is a good method to keep your money invested in.
There are more questions than answers, till the next time – to raising questions.