September 13, 2023
Inflation has been trending in the right direction, with the Consumer Price Index (CPI) falling from last year’s peak of 9.1% to 3.2% in July. However, due to a recent rise in oil prices, August headline CPI rose 0.6% over last month and 3.7% from the prior year versus consensus estimates of 3.6%.
The price of West Texas Intermediate (WTI) oil has risen over 30% since the middle of June to over $88, its highest level since November 2022. This was driven by a combination of strong demand and confirmation that Saudi Arabia and Russia will extend their production cuts through the end of the year.
Despite the uptick in prices, we believe inflation will continue to moderate as the economy slows and jobs growth cools. However, it could become more challenging to maintain the pace of disinflation if oil prices remain elevated and we see continued strength in the services sector.
Markets have seen a choppy start to September, and this week’s inflation data could be another source of volatility. If it reinforces fears that the pace of disinflation is slowing, we could see upward pressure on bond yields and downward pressure on stocks. In our view, the best defense against further volatility is to stay invested and diversified.
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