Ask the CFP

When Will Prices Fall?

“Lowering prices is easy. Being able to afford to lower prices is hard.” 

~ Jeff Bezos

Question:  Why is it taking so long for inflation and interest rates to come down? 

Answer: At the May Federal Reserve meeting, Chair Jay Powell, and the Federal Open Market Committee (FOMC) affirmed that because inflation is not yet at the  desired 2% there would be no rate cuts at this time. The federal funds rate will remain at the target range of 5.25% - 5.50%. Until the FOMC has more confidence that inflation is falling, we won’t see rate cuts. 

The Fed’s higher-for-longer stance has been reinforced by recent inflation readings. “It is likely that gaining such greater confidence will take longer than previously expected,” stated Fed Chair Powell in his post-meeting conference. “We are prepared to maintain the current target federal funds rate for as long as appropriate.”

We’ve been stuck at this current inflation level for some time. It’s a lot like losing weight with those last five pounds being the most difficult and taking the longest time and being the most stubborn. Here are a few factors keeping prices where they are, and in some instances even rising when we want them to decline: 

1. Supply Chain: Although we’ve come a long way since Covid days, in some instances there are still disruptions in global supply chains causing shortages in materials and goods. Prices tend to rise when supply is limited. Semiconductor shortages affect electronics and influence prices for computers, electronics, and even cars.

2. Consumer Demand: The other side of supply is demand. As we move further away from the pandemic, we want what we want when we want it. High demand places upward pressure on prices. Suppliers can command higher prices as long as demand remains high. 

3. Geopolitical Events: Oil prices, which influence the cost of numerous items beyond gas at the pump. Ongoing conflicts in oil-producing nations influence oil and gas prices causing spikes due to supply disruptions.

4. Expectations: Consumers may delay purchases based on the belief that prices may be lower in the future. This delayed gratification may sound counterintuitive, but if shoppers expect prices to decline, some may delay current spending. Weakened demand then causes businesses to lower wages or lay off employees to reduce their costs keeping prices at current levels, or in some instances higher. 

5. Monetary Policy: The Fed attempts to navigate the terrain between inflation, money supply and employment. 

The Fed has held rates steady for the past six FOMC meetings. The last rate hike was back in July 2023 with the federal funds rate at its highest level in over 20 years. Inflation remains due to a combination of all the reasons outlined above. Unfortunately, there’s no quick fix, and prices may not return to pre-pandemic levels anytime soon. 

The FOMC meeting statement notes “Beginning in June, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion. The monthly redemption cap on agency debt and agency mortgage-backed securities will remain at $35 billion while investing any principal payments in excess of this cap into Treasury securities.”

The Fed is focused on keeping interest rates stable for now and that the bar for raising interest rates, a recent fear of the market, is remarkably high. The next move, eventually, should still be a rate cut.” 

My experience with weight loss is that if I gain a few pounds quickly, they tend to come off in a reasonable amount of time. It’s those last few that are the most stubborn. The analogy holds for inflation as well. Coming out of the pandemic, the high inflation rate caused by an influx of “easy money” pushing the prices of far fewer goods services slowed in a predictable manner once economies reopened and the stimulus money came to a halt. Those last few pounds, or in this case, percentage points of inflation, are the toughest to obtain. These last few months have “shown a lack of progress toward our two percent objective,” said Powell who remains strongly committed to bringing inflation down to its stated 2% target. Reaching the target may require more time, and time just takes time. Stay focused and plan accordingly.

FactSet June 3, 2024 

Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. The opinions expressed are those of the writer as of June 12, 2024,  but not necessarily those of Raymond James & Associates, and subject to change at any time based on market conditions and other factors. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including asset allocation and diversification. While familiar with the tax provisions of the issues presented herein, Raymond James financial advisors are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Please consult your independent legal counsel and/or tax professional regarding any legal or tax issues raised in this material. Raymond James and its advisors do not offer tax or legal advice. 

“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL Main™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.” This article provided by Darcie Guerin, CFP®, First Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at (239)389-1041, email darcie.guerin@raymondjames.com. Website: www.raymondjames.com/Darcie.