🔥 Hot, hot heat

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It’s hot out here, folks.

96 degrees in Charlotte, according to my weather app.

The front porch of hell, according to my lawn, which is on a modified watering schedule due to the drought in North Carolina.

And perhaps the hottest economic fever we’ve seen in a while, according to Consumer Price Index data.

Mortgage rates are back above 6%, gas costs $4 a gallon, and you’re once again cursing under your breath in the grocery checkout line. (OK, maybe you never stopped.)

Last week’s CPI confirmed that inflation is the highest it’s been since mid-2023. 

You know — the tail end of the most recent crisis. That wound still feels awfully fresh, doesn’t it?

We all know temperatures rise in degrees. Your plans on a partly cloudy, 85-degree day may look totally different than when it’s 95 degrees and the UV index is blistering.

Yet when it comes to investing, our past scars can throw us into a panic quickly.

Today’s inflation is hot, hot heat. But we may not be dealing with a mid-summer market-melting scorcher.

We’ve all heard the grumbles.

Five years ago, that burger—or iced latte, lipstick, haircut, airplane ticket—cost so much less than it does today. It’s that damn inflation again!

You’re right. That is technically inflation. Prices are much higher than they were before.

But inflation isn’t just prices. It’s a story of what’s driving prices and how many iced lattes, lipsticks, haircuts and airplane tickets you can actually afford. Understanding these dimensions can tell you just how sticky and dangerous a flare-up could be. 

The story behind today’s inflation is…complicated.

The overall CPI index – a gauge of prices that reflects the average American’s budget –  is growing at a 4.2% clip, the fastest pace in three years. Energy prices rose 41% year over year. Plane tickets jumped 27%. Ground beef prices shot up 12%.

That’s real pain, folks, and you’ll feel it when you plan that July 4 cookout and summer getaway.

But Wall Street – and your portfolio – don’t really focus on these numbers. While food and gas prices definitely hit your wallet, they’re usually written off as temporary blips. 

Why? Because they’re not the best indicators of a true inflation crisis. More like how many ships are making it to our ports, how much rain our precious crops are getting, and which world leaders are picking fights.

Inflation becomes an entrenched, overwhelming problem when Americans have so much money that they’ll keep paying insane prices across a wide range of goods and services.

Right now, that doesn’t seem to be the case.

Strip out food and gas (core), and inflation was a tamer 2.8% year over year. The pace of services inflation – the metric I like to watch for degrees of a crisis that tracks rent, haircuts, hotels, and the like – was actually unchanged at 3.6%.

Inflation ex-Iran war messiness looks OK. Not great, but manageable.

Wages are also a crucial metric to gauge how nasty and persistent inflation could get. 

Americans and businesses both thrive best when prices are going up, but worker pay grows slightly faster than prices. Wages comprise about 85% of business costs, so slow improvement in paychecks helps companies keep margins at bay.

We’ve seen it time and time again throughout history. Since 1965 (when worker pay data was first published), wage growth has exceeded inflation about 60% of the time.

In other words, the world works best when we can all afford things in a controlled economy. It’s the ole burger-flation concept I’ve covered before.

In 2022, the job market was on fire. People were quiet quitting, working three jobs and negotiating insane raises. It was an awesome turn of the employer-employee tables…until 9% inflation overwhelmed those bigger paychecks. Things got out of control, and life became undeniably less affordable for everyone.

Today, the opposite is happening. Prices are growing faster than wages, reversing a few years of getting the paycheck-inflation dynamic back in balance. 

Hear me when I say this is not ideal. American households are clearly getting squeezed beyond their means.

But this isn’t an inflation crisis in the making. If anything, it’s a sign the opposite is taking place. Subdued demand could actually keep a lid on how quickly prices rise because a lot of us can’t afford more stuff.

There are degrees of hot, hot heat.

And they matter when you’re trying to quantify inflation’s threat to your investments.

It’s definitely summer out there. I can feel the sun on my face and the AC blasting through the vents. When inflation bites, interest rates trend higher and investors tend to prefer quality and value. Our Federal Reserve superheroes may even raise rates soon.

Affordability is one of the most complex challenges in our society. Climbing the corporate ladder doesn’t cut it any more. Wealth goes to shareholders over employees. The housing market is a racket. Don’t get me started here, because I’ll never stop.

But this isn’t the sweltering heat we felt four years ago.

All of this can be true at the same time.

Thanks for reading!

Callie