September 16th, 2022
Rising core inflation gave markets a rude wake-up call this week, throwing cold water on the market’s recent narrative that the Federal Reserve would soon pivot to a less aggressive posture. Core CPI surprised to the upside, jumping 0.60% in August. That was above estimates of a 0.30% rise. The month-to-month increase pushed the core inflation rate up 6.30% from year ago levels. Headline inflation didn’t fare much better, rising at an annualized rate of 8.30%. While this eased somewhat from July’s 8.50% rate, it is still well above acceptable levels. After a summer of spending, broad-based inflation seems to have finally taken a toll on consumers’ budgets as aggregate sales excluding autos fell -0.30% for the month. Friday’s trading session compounded what was already a tough week for the market as industrial bellwether, FedEx, issued a profit warning and withdrew guidance for the year citing slowing global economic demand. The market grappled with a host of negative readings this week, which could now put Q3’s once rosy earnings outlook at risk. With the FOMC meeting next week, and some question on whether the Fed will raise 0.75% as expected or go even larger, traders decided to take off risk and lock in any remaining profits from the recent rally. For the week, the S&P 500 tumbled -4.77%.
The Terrible No Good Inflation Report
The August inflation report was not what markets were expecting. As recently as Monday, talking heads were touting that peak inflation had arrived and signs were emerging that the Fed would be successful in orchestrating a soft landing. What we got instead was a report showing an acceleration and broadening of inflation throughout the economy despite a large drop in energy prices. Headline inflation rose 0.10% month-to-month even as gas prices tumbled -10.60%. The month-to-month rise means that the overall inflation rate increased 8.30% on a year-over-year basis. What really caught markets off guard was the 0.60% rise in core inflation (excludes volatile food and energy prices), which rose an annualized 6.30%. That’s well above the Fed’s 2.00% target level and a significant jump from July’s 5.90% reading. Setting aside some relief at the gas pump, everywhere else consumers were hit by high prices. Medical care and new vehicle prices led the way, up 0.80% month-to-month each. Shelter costs, which include rents and various other housing-related expenses climbed 0.70% for the month. Food prices also moved higher, bringing that component’s annualized increase to 13.50%. That was the category’s largest increase since March 1979. With roughly three-quarters of the CPI components above 4.00% yoy, the concern is that inflation is now broadly entrenched, requiring the Fed to raise rates more and to hold them there for longer. The picture at the wholesale did not show much different. The PPI Index fell -0.10% in August, pushing the annualized rate to 8.70%. The drop was mainly driven by a decline in energy prices, down -6.00% for the month. Meanwhile, core PPI prices were up 5.60% from the year ago period. With the decline in demand being seen in retail sales and the growing number of cautionary comments from company CEOs, markets were optimistic some of this anecdotal evidence would begin to percolate into last month’s inflation readings. That expectation was not remotely close to the reports’ reality.
High Prices Sting Consumers
Retail sales rose 0.30% in August to $683.3 billion, driven largely by a jump in motor vehicles and parts. Excluding autos, sales fell -0.30% for the month. The headline sales figures was driven by a 2.80% jump in sales at motor vehicle and parts dealers which helped to more than offset the -4.20% decline in gas station receipts that were impacted by the decline in oil prices. Restaurants and bars also managed to ring up more sales in August, which were higher by 1.10% as consumers squeezed in some last-minute summer get-togethers before back to school and back to office. However, consumers were forced to cut back elsewhere as high prices hit their wallets. Online shopping took the hit, down -0.70%. In another blow to Q3 economic growth, July sales figures were revised downward to reflect a -0.40% sales decline. High prices seem to have finally forced the consumer to tap out and to be more careful when considering their spending habits.
The summertime rally hit a brick wall this week as high core inflation, weakening consumer spending, and a potentially tough earnings season weighed on sentiment. All three of these items are tethered together by interest rates, and we suppose there is some good news in that markets won’t need to anguish over the inflation report for long since the Fed will issue its rate response on Wednesday. Coming out of their Jackson Hole Economic Symposium, the Fed had prepared markets for a 75-bps bump following September’s meeting. The Fed should leave itself some flexibility when it telegraphs rate hikes, but if the previous message was based on the belief that the higher interest rates were beginning to have some impact on inflation, it raises the question of whether the Fed now feels it needs to be even more aggressive given August’s inflation surprise. Will the Fed stick to the expectations they set, or will it go big in order to arrest future inflation expectations? That is the answer markets will anxiously await next Wednesday.
The Week Ahead
It will be a big week for markets as the Federal Reserve convenes its September FOMC meeting. Markets are currently pricing in a 75-bps point hike which will bring the benchmark lending range to 3.00%-3.25%. With core inflation running hot, the central bank could surprise with a 100-bps hike which could add more volatility to the markets. In economic news, we turn to the housing market. The Fed’s monetary tightening has sent 30-year mortgage rates surging past 6.00%, throwing more cold water on the red-hot housing market. A further slowdown is expected in existing home sales and housing starts.
Social Security Basics: What You Need to Know
Many Americans are eagerly awaiting next month’s announcement of the cost-of-living adjustment (COLA) that will affect Social Security benefits. The Social Security Administration (SSA) calculates a COLA each year using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Specifically, it compares the CPI-W from the third quarter of the current year to the same quarter the previous year. The percent increase (if any) becomes the COLA for the following year and affects the monthly benefit paid to retired workers. Given rising inflation, this year’s COLA is estimated to be the highest in four decades.
The annual COLA is just one piece of the Social Security puzzle, and there are several opportunities for workers to maximize benefits over their lifetimes. Your claiming strategy, including when you claim and how you claim your Social Security benefits from Uncle Sam, can make a big difference in what you receive in your monthly checks.
While Social Security as a whole includes retirement benefits, disability benefits, survivor benefits, and Medicare, the focus of the following Q&A is on the retirement benefits component. We encourage you to consult with your financial advisor to ensure your Social Security claiming strategy complements your overall retirement plan.
How are Social Security benefits calculated?
The size of your monthly Social Security check when you retire depends on how much you earned during your highest-earning 35 years prior to age 62 and how much you paid in Social Security tax during your working years. Your previous earnings are restated in terms of today’s wages to adjust for inflation, and the earnings for the highest 35 years are averaged. If you don’t have 35 years of earnings, zeros are averaged in for the years you didn’t pay into Social Security.
Who is eligible for Social Security Retirement Benefits?
To be eligible for Social Security benefits, you must earn at least 40 credits. You earn Social Security credits when you work in a job and pay Social Security taxes. In 2022, you receive one credit for each $1,510 you earn, up to four credits per year. If you do not qualify for benefits by working and earning at least 40 credits, you may be able to claim benefits under the record of your spouse or ex-spouse.
What is the maximum Social Security retirement benefit?
Currently, in 2022 the maximum amount that an individual can qualify to receive per month if he/she retires at full retirement age is 2022 is $3,345. However, your actual benefits may vary depending on several factors.
What factors affect the amount of my Social Security retirement benefits?
Your earnings: The biggest contributor in determining your benefits is how much you earned during your highest-earning 35 years before age 62, adjusted for cost-of-living increases.
Your age: The age at which you start taking benefits also affects how much you receive per month once you start. The longer you wait to start taking benefits, up to age 70, the higher your monthly benefits will be. If you start taking benefits prior to full retirement age, your benefits will be permanently reduced. The age at which you start collecting benefits can significantly impact the amount you receive – both in the monthly amount and the total benefits received over your lifetime.
Other income: If you earn income in the same year you receive benefits, your Social Security benefits may be reduced.
Pensions: A pension from a job in which you did not pay Social Security taxes, such as a government job, will reduce your benefit.
When can I claim Social Security retirement benefits?
You can claim your Social Security retirement benefits as early as age 62 or survivor benefits as early as age 60. The full retirement age is 66 if you were born from 1943 to 1954. The full retirement age increases gradually if you were born from 1955 to 1960, until it reaches age 67. For anyone born 1960 or later, full retirement benefits are payable at age 67.
If you claim early: If you choose to start receiving benefits early, your benefits are reduced by a certain percentage for each month before your full retirement age. If you collect Social Security benefits before your full retirement age and continue to work, you will forfeit some or all of your Social Security benefits if your earnings exceed specified limits. If you’re younger than full retirement age during all of 2022, you will lose $1 from your benefits for each $2 you earn above $19,560. Once you reach your normal retirement age, you can earn any amount without affecting your benefits.
If you are married: Our advisors recommend that couples make decisions about their Social Security claiming strategy as an economic unit, considering what is in the best combined interest of both spouses to maximize their total lifetime benefit. This analysis considers factors such as income, age, and the health of each spouse. We advise individuals to speak with an advisor who can help identify and compare your options to help ensure you make the most of your benefits.