Inflation indicators show good news... & bad

We are all painfully aware that the cost of buying anything today...from groceries to car insurance to a plane ticket...has gone up considerably over the last few years. However, there continues to be some good news from the latest Consumer Price index (a key inflation gauge) released for October 2024. Although the index ticked up slightly to 2.6% (after previously posting 6 consecutive months of declines), there were no big surprises that should alter the Fed's course of action. At least for the short-term.

Fed rate cuts continue

Although the CPI report came out after last week's FOMC meeting, the Fed's decision and subsequent press conference was nonetheless still uneventful & boring. (Two of my favorite market trends!) As expected, the Federal Reserve opted for a 25 bp rate cut, pushing the fed funds rate to a new target range of 4.50%-4.75%. The decision was unanimous as inflation has pulled back significantly from its pandemic-era peak of 9.1% in June 2022 and is slowly moving toward policymakers’ long-term annual target, near 2%.

During the press conference, Fed Chair Powell noted that the "downside risks to growth have diminished, inflation remains well anchored, and policy rates are still restrictive." He also added the election will have no bearing on near-term rate decisions.

Although this should keep interest rates on a path to a more neutral setting, longer term rates continue to stay well above 4%. This bodes well for fixed income investors still looking to lock in high bond rates (read one of my prior blog posts on how to position your portfolio in a still-high interest rate environment: Is "higher for longer" about to come to an end?), but not for those keeping an eye on mortgage rates.

USPS Will Keep Stamp Prices Unchanged In 2025

The United States Postal Service announced that it will not raise the price of stamps in January 2025, keeping the rate for first class mail at 73 cents. This comes after four increases over the last three years (including one this past July), which totaled a 26% cumulative hike over that time period—the largest three-year increase on record! This is another example that after the surge in prices over recent years, the pace of inflation is likely to moderate moving forward.

The U.S. Dept. of the Treasury has announced new Series I Bond rates. 

Linked to inflation, newly purchased I bonds will pay 3.11% annual interest from November 1 through April 30, 2025, which is down from the 4.28% yield offered since May and the 5.27% offered in November 2023.

The new rate includes a variable portion of 1.90% and a fixed portion of 1.20%. The fixed rate is down from 1.3% announced in May. After hitting a record high of 9.62% in May 2022, the I bond yield is down significantly, again linked to inflation reports.

Social Security cost-of-living normalizes

After two consecutive years that saw the highest cost-of-living adjustment on record, the Social Security Administration just announced that the latest adjustment will be 2.5% in 2025. When that increase goes into effect, it will be the lowest adjustment to benefits that beneficiaries have seen since 2021, when the cost-of-living adjustment (COLA) was 1.3%. The COLA for Social Security is based on government inflation numbers, so lower inflation means a smaller adjustment to benefits.

A trend is emerging, but we're not out of the woods yet

The Fed cutting rates...stamp prices unchanged...Savings Bond rates coming down...Social Security COLA lower. Taken by themselves, these don't mean much, but collectively, these factors show real-world signs of inflation coming down from their 2020 highs. Although these signs are very positive, we are still advising clients not to get too complacent with inflation expectations. More tariffs as well as increased government spending have the potential to boost growth but also aggravate inflation, which remains a substantial problem for U.S. households despite easing off its meteoric peak in mid-2022.

Fixed income markets are now expecting just another three-quarters of a point in cuts through the end of 2025, about half a point less than what was priced in before the presidential election. The thinking comes after the central bank has already equaled this 0.75% cut from its key borrowing rate and had been expected to move very aggressively ahead into the new year. While expectations should be dampened, there are still opportunities for investors to position their portfolios (both in stocks and fixed income) accordingly.

-Jason