TSI #9: Inflation is finally slowing down. What does that mean for you?

Consumer prices rose 8.5% in July, less than expected. In the past year or so, we have seen inflation as the most influential market driver. If inflation gets worse, the markets are in a bad mood. If it gets better, everyone celebrates. 

However, is there really a reason to celebrate? Inflation is still at 8.5%, which is far from the 2% target. In the article I will explain what could happen if inflation numbers keep going down.

What happened in July?

Many factors contribute to inflation. I do not want to confuse you with a long article on that topic. Let us just say that things got better. A lot of it had to do with the fact that energy prices went down. Energy prices are a key determinant in measuring inflation. 

This year the flow of oil was largely disrupted because of the current Russia-Ukraine war. Naturally, oil prices spiked in response and lay waste to many European countries. The connected global markets made sure the energy crisis spread all over the world. Stay tuned for my next article next Sunday where I will go over the history of the energy prices.

In July, there were signs of improvement, which offset the rising food costs. As a result, inflation did not move compared to last month. Here are the major inflation contributors and their most recent numbers.

So now we know what happened. But what does that mean for your portfolio?

How will your money be affected?

If inflation has indeed peaked in the previous months, we might see some relief. Firstly, your cash would stop losing value so rapidly. This would give you some peace, which is always appreciated. 

In regard to your investments, commodities would go down as fast as they went up. Commodities are considered a hedge against inflation due to their intrinsic value and tend to perform well when prices for consumer goods are on the rise.

The stock market, however, would resurrect. Why? I’ve mentioned in previous articles how the Federal Reserve (FED) acts in favor of reducing inflation with hiking interest rates. They planned a major hike when they saw June’s numbers. However, after July’s numbers came out, the whole market abandoned that thought. Since things are getting better, why risk shaking the market? As a result, most stocks jumped. 

Some investors even think that rate hikes are no longer necessary. Although, many analysts believe that the FED is not done yet and will not stop hiking rates until inflation is at least around 4%. 

What should I do now?

Many believe that inflation has peaked in June and will continue to go down. That’s what we would all like to see. However, the market is very unpredictable and can swiftly turn around.

You should always be prepared for all scenarios. Inflation at 8.5% is no reason to celebrate just yet. We still need to get to more sustainable levels.

To Your Financial Freedom