Sticky price items drive inflation
Source: Bureau of Labor Statistics, Federal Reserve Bank of Atlanta, as of July 14, 2022.
- Each month’s new consumer price index (CPI) release this year has roiled markets, and June was no exception. Inflation reached a new 40-year high while pricing pressures have become increasingly broad-based across the U.S. economy.
- As the chart shows, elevated inflation may remain with us through the coming quarters and perhaps years. Price pressures have increasingly been driven by “sticky” contributors, or those that are slower to respond to changing market conditions, such as rent and household furnishings.1
- In the June CPI report, for example, rising shelter costs—which includes rent and owners’ equivalent rent—were responsible for 35% of the 0.7% monthly increase in core CPI.1 Household furnishings and medical costs also contributed meaningfully.
- Amid unrelenting inflation, consumer and investor sentiment both hit multi-year lows as major market indexes have fallen in unison. The highly correlated decline has been unsurprising as inflation not only impacts stock and bond returns, but also the relationship between the two.
- Recent inflation data have served as painful lessons that the old diversification playbook needs to be rewritten for a time when bonds no longer balance stock volatility. Within this environment, investors may be wise to turn their focus toward alternative investments and real assets that have historically proven to be solid inflation hedges, including real estate, commodities and infrastructure.