Inflation slows in August: What does this mean for investors?

Inflation — the deadly word in the market — cooled down slightly in August. Investors can relax, but don’t get too comfortable.

• Consumer prices gained 0.3% in August compared to July — down from 0.5% the previous month.
• On an annual basis, prices are up 5.3% from August 2020.

What’s the big deal? Inflation’s direction has big implications for the economy — with too much seen as a negative for the stock market. In the past year:

• Supply chain issues and labor shortages sent prices soaring in just about every consumer category.
• Used car prices are up 32% and energy prices up 25%.

But car prices declined for the first time in 6 months and strategists are seeing factors that pushed up inflation slowly ease.

What crisis? In May, we highlighted 3 scenarios of rising inflation — with one leading to a recession.

• The best-case: Inflation is temporary and will fall over time.
• The worst-case: Inflation remains high and policymakers (i.e. The Fed) react too late — sending the market into panic.

Despite the 5.3% inflation rate being much higher than the Fed’s target of 2%, a slight decline in inflation helps move the economy away from the worst-case scenario.

Crisis averted? Not so fast. It’s not certain inflation has peaked. Businesses are still struggling with high shipping costs and difficulty sourcing products — all of which could keep driving up prices.

In a recent survey by the NY Federal Reserve, consumers expect inflation to average a pessimistic 5.2% in the next 12 months. But according to MW, these surveys are rarely a good predictor of future inflation.