*by Kevin Slater, CEO, Lead Advisor, CFP®*

As you certainly know by now, the US is experiencing inflation unlike anything we have seen in 40 years. The Federal Reserve (Fed) has been raising interest rates rapidly and we have begun to see the effects: inflation seems to have started to plateau. Here is the inflation index the Fed watches:

The markets in the past few weeks seem to think the Fed has accomplished their mission. They are projecting interest rates will not only peak early next year, but begin falling steadily immediately thereafter.

We are skeptical of the market’s view. While the Fed is likely to slow down the rate of increases, we are still a long way from their target inflation rate of 2%. And we suspect that not only will they be looking at the rate of inflation but also at the components of inflation.

The Fed knows that a little inflation is a nice thing, but a lot of inflation can be destabilizing to economies and social structures. It is problematic if large portions of the population cannot afford to eat or pay their rent. Here is a breakdown of the components of a more popular inflation measure - Consumer Price Index (CPI):

Look not only at the current inflation rates, but where they are relative to where they have been in the past year (peak and trough). As an example, used car inflation has dropped from over 40% to 2%. A great success that clearly reflects the higher cost of financing.

Other variables may not be as responsive to higher interest rates. For example, food inflation is high in part because wages are a big variable in food costs:

With the demand for workers being significantly higher than the number of unemployed:

Workers are able to command higher incomes which will continue to push costs higher…

We expect that until the number of job openings and the number of unemployed people better balance out, we will continue to have elevated interest rates. In the meantime, we will continue to keep duration unusually low in your bond portfolio.

Here’s hoping inflation comes down sooner than later!