Understanding Inflation

Key Takeaways

• Focus on core inflation (excluding food and energy) rather than headline CPI when evaluating Fed policy decisions, since the Fed uses core inflation to guide interest rate hikes
• Calculate 'excess inflation' by comparing current inflation to pre-pandemic trend lines; the current ~3% excess inflation is the real problem, not the headline 6% figure
• Recognize that news outlets sensationalize inflation numbers for engagement—dig deeper into what the data actually means for your portfolio before forming investment opinions
• Understand that food and energy price spikes are driven by supply chain and climate factors largely outside Fed control, so the Fed focuses on controllable inflation drivers when setting policy
• Use excess inflation trends as your signal for portfolio adjustments: if it accelerates, expect aggressive rate hikes; if it moderates back toward the 2% trend, expect less aggressive Fed action