Last week we got a first look at November inflation when wholesale prices tracked in the Producer Price Index showed that inflation, while decelerating from the month prior, still rose more than economists expected. If tomorrow’s CPI figures don’t slow down and the pace of price increases remains persistently high, expect stocks to react badly. In other words, you might not want to look at your retirement accounts tomorrow to avoid the potential heartache. Investors have been anxious about inflation, because high levels of inflation mean that the Fed will continue to stay aggressive with rate hikes going forward. The last four rate hikes have been 75 basis points. But currently, markets are pricing in a 77% chance that the central bank will hit us with a more moderate rate hike of 50 basis points. The Fed starts its meeting tomorrow, but we will have to wait until Wednesday for a decision on rates. While policymakers at the bank have made it clear that they will continue to raise interest rates, there is still a big question mark around how high they will raise them, and for how long. The higher rates go, the more painful the squeeze on all of us. Not only does it make borrowing money more expensive (think, higher interest rates on bank loans, like mortgages), but that in turn pumps the brakes on the U.S. economy. An economic slowdown tends to bring higher levels of unemployment, smaller pay bumps (or no raises at all), and the potential of a recession. Stocks are rising today ahead of the key economic reports and the next Fed decision. For those of you keenly watching the market (and your portfolio), don’t be surprised if there is volatility. -Kristin
