Wednesday's Scoop: Shook🌥️

Hey friend - here’s what you need to know today to inform your work, spending, and investments…

1. Inflation is making the comeback nobody asked for.

2. Policymakers believe the economy is doing well.

3. Borrowing costs aren’t likely to come down anytime soon.

Inflation Rate: +3.5% (YoY), +0.4% (MoM)
^{Policymakers aim for 2% YoY inflation. (CPI)}

Inflation is making a comeback. The Bureau of Labor Statistics’ Consumer Price Index showed that the cost of living increased by 0.4% in March, just as quickly as in February, and more than economists expected. More than half of the increase in living expenses came from higher energy and housing costs. Gasoline prices jumped 1.7% in March and 3.8% in February after several months of declines. Even with the rough couple of months, gas prices are only about 1.3% higher than a year ago. However, escalating geopolitical conflicts between major oil nations could mean higher prices at the pump this summer.

Finally, food prices have cooled off a bit. That’s not to say anything’s getting much cheaper. Grocery prices have held flat for two months, with the average trip only 1.2% higher than a year ago. Restaurant prices keep climbing, though, up 4.2% from last year.

When stripping out volatile food and energy prices, so-called core inflation has been 3.8% over the past year. That’s primarily thanks to home prices and rent, which have driven nearly two-thirds of the core cost of living increase. The next biggest offenders of the past 12 months have been car insurance (+22.2%) and medical care (+2.2%). Overall, the cost of living is 3.5% more than last year. Policymakers have been restricting spending and business activity by raising borrowing costs with hopes of getting annual inflation closer to 2%.

Policymakers believe the economy is doing well and don’t seem eager to make borrowing cheaper anytime soon. Newly released minutes from the Federal Reserve’s last meeting revealed little inclination to cut baseline interest rates, which currently sit at the highest level in over 20 years. Policymakers are surprised by how well the economy is doing. The Federal Reserve has raised its economic growth projections significantly since the December meeting, increasing its median real Gross Domestic Product (GDP) expectation for 2024 from 1.4% to 2.1%. With the economy seemingly strong enough to handle its restrictive policies and the cost of living still increasing more quickly than it wants, policymakers aren’t in a rush to stimulate more borrowing with lower rates.

The Market: ⬇️ -1.0%
S&P 500: 5,160.64
1Mo: +1% | 1Yr: +26% | 5Yr: +78%

The market tumbled lower on Wednesday after the March inflation report confirmed that living costs are still rising more quickly than policymakers hoped. Investors now expect the Federal Reserve to reduce interest rates much less rapidly than they did at the start of the year. Higher interest rates make it more expensive for companies to borrow, eating into the profits that drive their stock price. Higher rates also make interest-paying investments like cash and bonds a little more attractive relative to stocks, weakening demand.