Inflation cooled again in July. But what does that actually mean for your portfolio?
The latest Consumer Price Index showed prices rising 0.1% in July, bringing annual inflation down to 3.4%, from 3.5% in June. Core inflation, which excludes food and energy, came in at 2.5% over the past year.
That’s a step in the right direction, but it’s important to put the numbers in perspective. Inflation is still above the Federal Reserve’s 2% target, so this report doesn’t suddenly mean the inflation fight is over.
What it does do is give the Fed a little more breathing room.
The Federal Reserve left interest rates unchanged at its July meeting, keeping its target range at 3.5% to 3.75%. And now the Fed is looking at this inflation data alongside a labor market that has shown some signs of weakening.
So, what could this mean for your money?
First, interest rates.
If inflation continues to moderate, it could give the Fed more flexibility to lower interest rates in the future. That could eventually affect everything from mortgages and other borrowing costs to the interest you’re earning on cash.
That said, do not make a financial decision based on the assumption that rates are definitely going lower. The Fed is still watching the data, and one month’s inflation report doesn’t determine the path of monetary policy.
Second, bonds.
When investors expect interest rates to fall, existing bonds with higher yields can become more attractive. That can create opportunities for bond investors, particularly those who have been sitting on shorter-term investments while waiting for rates to change.
But again, this isn’t a signal to simply move everything into bonds. The right mix depends on your time horizon, income needs and overall financial plan.
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And third, stocks.
Lower inflation can be positive for stocks because it can reduce pressure on companies’ costs and potentially make financial conditions more favorable.
But there’s another side to the story. If inflation falls because the economy is weakening significantly, that’s a different environment for investors. That’s why the Fed isn’t looking at inflation in isolation. It’s balancing price stability with employment and economic growth.
Today’s inflation number is encouraging. But it’s one piece of a much bigger picture.
The important question isn’t just, “Where is inflation going?”
It’s, “Does my financial plan still make sense if inflation, interest rates or the economy don’t behave exactly as I expect?”
That’s the question worth asking after any major economic report.
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Bautis Financial LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
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