The principal indicator of inflation is the Consumer Price Index (CPI), which signifies the volatility in the cost of a selected assortment of products and services. It is the responsibility of the U.S. Federal Reserve to maintain inflation under control, and it aims for an annual CPI increase of 2%.
Aside from housing and equities, however, substantial fluctuations in inflation above or below the Fed’s target can have a profound effect on asset prices. In 2023, the CPI is projected to decelerate significantly, comparable in magnitude to the periods of 2009 and the early 1980s. Both times, the S&P 500 (SNPINDEX: GSPC) stock market index experienced a significant movement; therefore, the following describes what might transpire in 2024.
Bear and bull figurines made of bronze, representing a bear and bull stock market, respectively.
Inflation peaked forty years ago in 2022.
A deceleration of the economy can result from households’ and businesses’ inability to purchase the same quantity of products and services with their money when inflation is excessive. Conversely, insufficient inflation, whether it be declining prices (deflation) or not, can compel organizations to reduce output and terminate personnel. This impacts the economy as well.
Supply chain disruptions, interest rates, government expenditures, and money supply are a few factors that can affect inflation. During the most severe stages of the pandemic in 2020 and 2021:
Historic lows were reached in interest rates.
As economic stimulus, the United States government inundated the economy with trillions of dollars.
The Fed stimulated the economy through quantitative easing, an expansion of the money supply.
The COVID-19Nineteen outbreaks resulted in the worldwide closure of factories, causing supply chain disruptions.
All of those things were inflationary, so it’s no surprise the CPI soared to reach a 40-year high of 8% in 2022, far beyond the Fed’s target. It precipitated an annual decline of 18% for the S&P 500.
In response, the Fed raised interest rates from 0.25% to 5.50% over the last 18 months to counteract that inflation. It’s working so far with the latest CPI reading for Nov. 2023 coming in at an annualized rate of just 3.1%.
With December almost in the books, the CPI is likely to end 2023 with an average annualized increase of 3.5%. That would mark a 4.5 percentage point decline from 2022, when the CPI came in at 8%.
