Broker Check


December 27, 2022

The consumer price index (CPI) is a measure of the average change over time in the prices paid by consumers for goods and services. Over the long term, inflation erodes the purchasing power of your income and wealth. This means that even as you save and invest, your accumulated wealth buys less. This rise in prices has impacted almost all sectors of the economy: ranging from the grocery store to the gas pump. Looking at the graphic below, we can see that this has increased to as high as 9.1% this year. The 10-year average is only 2.3%!

The Federal Reserve’s one major way to help reduce this inflation is through increasing interest rates. This helps reduce prices through increasing the cost of borrowing- causing the demand for goods and services to decrease. The general philosophy behind this is that companies will pass this additional cost onto the consumer. Then, if goods and services become too pricey, less people will buy them, and sellers will have to lower their prices to retain customers.

The Federal Reserve began increasing interest rates in March and has continually increased them as the chart below illustrates. We have since seen interest rate hikes of 75 basis points in June, July, September, and November. In a recent speech Jerome Powell has set the expectation of a 50-basis point rate hike in December. He stated ““It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting.”

Fed policy decisions to combat inflation have caused economic growth to lose momentum and Jerome Powell is aiming for a “soft landing”. That said, the U.S. economy entered this growth deceleration from a position of strength. Among other things, strong consumer and corporate balance sheets, as well as low unemployment, should help the economy absorb tighter monetary policy without tipping it into a deep prolonged recession like we saw during 2008. Just like with everything, rising interest rates has its pros and cons but we have strong faith in the companies that make up the stock market/ economy going forward.