Gavin W. Stephens

Chief Investment Officer

June 19, 2024: Positive News on the Inflation Front

A few months ago, an unorthodox economic theory began to gather attention. Rather than constraining economic activity, could higher interest rates instead be stimulating it? The question seemed timely. Despite interest rates at 16-year highs, the U.S. economy expanded by an average of 4% in the second half of last year. Following that unexpected economic surge was a surge in consumer prices. In the first quarter of this year, the core Consumer Price Index accelerated to an average 3-month annualized run rate of 4.2% during the first quarter. Higher rates were supposed to dampen demand, not stimulate it.


In a previous Weekly Update, we acknowledged that higher rates should improve the spending power of certain segments of the U.S. population, particularly Baby Boomers with savings. But we were not prepared to suggest that, in aggregate, higher rates would prove stimulative. In our view, higher rates would do their work of slowing economic activity and lowering consumer prices. Last week’s Consumer Price Index (CPI) report brought positive news on that front: both headline and core inflation surprised to the downside, with 3-month annualized core inflation decelerating to 3.4%. While one report does not make a trend, the May CPI report was a positive one, both for consumers and for traditional economic theory.


Weekly Market Update: June 19, 2024