Inflation continues to cool, creating more hope for rate cuts.
The June Consumer Price index (CPI) rose 3.0% compared to last year, which was below last month’s reading of 3.3% and the expectation of 3.1%. Core CPI, which excludes food and energy rose 3.3% from a year ago. This was below last month’s reading and the expectation which were both 3.4%. This also marked the smallest annual increase in core CPI since April 2021. Food was up 2.2% over the last 12 months with food at home up ...
Inflation continues to cool, creating more hope for rate cuts.
The June Consumer Price index (CPI) rose 3.0% compared to last year, which was below last month’s reading of 3.3% and the expectation of 3.1%. Core CPI, which excludes food and energy rose 3.3% from a year ago. This was below last month’s reading and the expectation which were both 3.4%. This also marked the smallest annual increase in core CPI since April 2021. Food was up 2.2% over the last 12 months with food at home up 1.1% and food away from home up 4.1%. Energy was up 1.0% as gasoline was down 2.5% and electricity was up 4.4%. Motor vehicle insurance continued to be an outlier as it was up 19.5%. The shelter index also continues to be a problem for inflation as it was up 5.2% and accounted for nearly 70% of the 12 month increase in core CPI. While this is off the peak of around 8%, the shelter index continues to lag real time data considering the annual inflation rate for new rental contracts fell 0.4% in the first quarter this year. This was down from the record highs around 12% just two years earlier. Part of the reason for the lag in the shelter index is the government constructs it by sampling a “staggered panel” of renters and homeowners. It splits the sample into six groups, and surveys each on a staggered basis every six months. I do believe this means we will continue to see shelter fall, which should be a major positive for the inflation rate. With this report I believe the chance for two rate cuts before the end of the year is now more likely.
Producer Price Index disappoints against expectations
The Producer Price Index (PPI) rose 2.6% in the month of June, which was above the expectation of 2.3%. Core PPI rose 3.0% in the month, which was above the expectation of 2.5%. Although this looks troubling, I still believe these rates are manageable, especially considering the several months of positive data when compared to the CPI. I don’t think this report should be cause for concern, but it should definitely be monitored in the months ahead. I’m still looking for both core CPI and PPI to head closer towards the 2% target as we exit 2024.
The Labor Market Can be Confusing, Which Survey Should You Trust?
We received the job numbers last Friday and lately there have been big differences between the establishment survey and the household survey. Because of these major differences, some people say these numbers are not worth relying on. But if one understands why the two are different, it justifies that the establishment survey is the one to follow. The establishment survey/nonfarm payroll number comes from employers who detail how many employees are working at their company. The household survey is completed by asking households who is currently working in their household. We have seen an increase in undocumented workers and when these people receive a call from any US government surveyor, they do not want to answer any questions for obvious reasons. This has likely led to part of the discrepancy between the two surveys. I believe businesses will provide a more accurate picture of labor market over a simple household survey. I especially think this is true when you consider the household numbers are based on surveys of approximately 60,000 households. These household responses are then used to calculate the numbers for the entire US population.
Investors beware, what goes up must come down!
I remember since I was a little kid there was a saying: the higher you climb, the further the fall. I believe this applies to almost everything, including the Magnificent Seven stocks. The S&P 500 this year has increased in value by $6.2 trillion, the Magnificent Seven having contributed $4.2 trillion. Throughout history, we have seen similar periods with stocks that have dominated the market going all the way back to the 1920s when it was the railroads. Then about 20 years later, it was chemical companies and automobiles. If you lookback 40 years, who could forget the AT&T monopoly and their break up in 1984. Over history, markets have gotten it right when it comes to the benefit of technology, but the highflyers in the beginning generally do not do as well as time progresses. I believe many investors could lose buying the high flyers at these prices. Don’t forget about the Tortoise and the Hare.
Financial Planning: What is the Goal of a Roth Conversion?
A Roth Conversion is the process of transferring funds from a tax-deferred retirement account to a Roth account. When the funds are transferred, the amount is reportable as income and taxed during the year it occurs. However, once the funds are in the Roth, they can continue to be invested and grow tax-free without any required distributions in retirement. Unlike contributions, there is no limit on the amount you may convert. The transaction itself is relatively simple, you’re just moving money from one account to another. The difficult part is determining when, how much, and how often you perform these conversions. Many people and advisors mistakenly think the goal of Roth Conversions is to reduce your lifetime tax bill, which is not the case. The goal, along with most retirement planning strategies, should be to increase your after-tax retirement income; reducing taxes is simply a byproduct of that. Reducing taxes and increasing after-tax income may seem like the same thing, but they are not. What matters when performing a Roth Conversion is the marginal tax rate at the time of the conversion and the tax rate in retirement if that conversion is not performed. This marginal tax rate includes all taxes such as federal, state, net investment income, capital gain, and IMRAA. If you can convert funds at a lower tax rate than they would otherwise be subject to if not converted, you will increase your level of after-tax income in retirement, which accomplishes the primary goal. If your goal was simply to reduce lifetime taxes, that may cause you to convert too aggressively by converting too much and pushing yourself into a higher tax bracket. If you live long enough this may reduce your total taxes, but if you paid too much tax upfront on the conversion, you may not have enough after-tax Roth funds to create the level of income you need. In many cases it is more appropriate to perform several smaller, more calculated conversions. You probably won’t convert 100% of your pre-tax funds, you may still have some extra Medicare premiums to pay, you may eventually get pushed into a higher tax bracket, but that may be necessary if the net result gives you the highest level of income after paying those.
Companies Discussed: Carnival Corporation (CCL), Levi Strauss (LEVI) and International Paper (IP)
