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Has inflation truly peaked? You couldn’t blame some Americans for thinking so. In the summer of 2022, a gallon of gasoline cost over $5. By December, prices had dropped to below $3.75 and seemed poised to dip significantly lower. Local groceries began posting reduced prices. Even used-car prices started drifting downward. Meanwhile, on November 30, investors went on a short-lived stock-buying binge after Federal Reserve (Fed) chair Jerome Powell suggested the Fed would soon begin “moderating the pace of rate increases.” For some, it seemed, peak inflation had finally arrived.

Or maybe not. Two days after Powell’s public comment, the US Labor Department’s monthly jobs report showed that average hourly earnings had jumped by an annual rate of 5.1% versus expectations of a 4.6% increase.1 Other recent Consumer Price Index (CPI)2 data show that rental costs have also stayed stubbornly high, as have prices charged by restaurants, car repair shops, home-furnishing firms, and many other businesses. 


Bringing Prices Down Is Hard

Inflation, as measured by the CPI, is now running at a still-high annual rate of 7.70% (as of October 2022).3 Ultimately, the Fed’s goal is to drive inflation down to around 2%. But history suggests this won’t be easy, and part of the reason has to do with what economists call “sticky” inflation—the kind that tends to stay high even as certain commodity prices (e.g., oil, grain, lumber, etc.) seem to fluctuate. Long after supply-chain constraints or temporary fuel shortages cease to be primary drivers of inflation, sticky inflation—sometimes called structural inflation—is likely to keep other costs for labor, rents, service providers, and some durable goods at relatively elevated levels.

To strip out the statistical “noise” that volatile prices create, most economists prefer to focus on core inflation, separating out food and energy prices from the less volatile categories. In October 2022, core inflation was running at an annual rate of 5.3% (compared with 7.7% overall annual inflation).4


Flexible vs. Sticky Inflation

While core inflation provides one way to strip out price volatility, another useful framework, developed by economists at the Federal Reserve Bank of Atlanta, uses a strategy in which the published CPI spending components are broken down and divided into two distinct buckets: “flexible” items that change prices at least every 4.3 months and “sticky” item categories whose prices change less often. Looked at in this way, it’s clear that prices of the sticky variety have been inexorably climbing since June 2021 while flexible prices (including motor fuels) were bouncing up and down before sharply declining after June 2022 (FIGURE 1).5



Sticky vs. Flexible Prices (2013-2022)

Data as of October 2022. Source: Federal Reserve Bank of Atlanta.


Unfortunately, it turns out that only 30% of the CPI basket categories fall into the flexible bucket. The other 70% are considered sticky (FIGURE 2). Flexible prices are more likely to be buffeted by factors such as supply shortages, transportation snafus, bad weather, foreign wars (looking at you, Russia-Ukraine), or unemployment.



Flexible and Sticky Prices in the CPI Market Basket

Frequency of adjustment figures refers to the number of months in which prices for a given category were adjusted. Fewer months indicated relatively frequent price adjustments while more months indicated relatively infrequent adjustments. *Relative importance refers to the table authors’ calculation of the appropriate relative weighted average for each category. **OER refers to owner’s equivalent rent. Chart adapted from the May 19, 2010 Federal Reserve Bank of Cleveland economic commentary, “Are Some Prices in the CPI More Forward Looking than Others? We Think So” by Michael F. Bryan and Brent Meyer. Source: Bureau of Labor Statistics and the Federal Reserve Bank of Atlanta. Most recent data available. 


Many items on the sticky side of the inflation ledger are not especially beholden to supply-chain challenges. Evidence suggests that strong demand probably holds the most influence on sticky-price categories—the same strong demand that the Fed’s campaign of interest-rate hikes is trying to cool off.


Economists often link the prevalence of sticky inflation to the notion of inflation expectations.


Sticky Inflation and Inflation Expectations

Sticky prices are seen as efforts by price setters (i.e., business entities) to stay one step ahead of rising costs by setting their prices at a high level for as long as possible.6 That’s why economists often link the prevalence of sticky inflation to the notion of inflation expectations—the idea that rising prices create expectations that the general level of all wages and prices will continue to rise until inflation embeds itself in consumer psychology and morphs into a self-fulfilling prophecy (as happened during the 1970s and early 1980s). 

Two important factors are thought to be decisive drivers of sticky inflation: wages and housing costs.


Sticky Wages

Although the Atlanta Fed’s flexible-vs.-sticky breakdown doesn’t include wages, economists regard them as particularly sticky. As the double-digit inflation of the 1970s illustrates, stronger wages can prompt businesses to raise prices, which in turn prompts consumers to demand still higher wages, and so on. Sticky-wage theory further states that employee pay is resistant to decline, even under deteriorating economic conditions, and that workers will resist pay cuts—motivating managements to reduce costs elsewhere, including layoffs, if profitability falls.7 

Evidence suggests that wages are indeed rising, and that job creation has defied the Fed’s efforts to engineer an economic slowdown. In addition to November’s surprise jump in wages, job-growth figures for the same period showed that nonfarm payrolls increased to 263,000—well above the expected 200,000 estimate (FIGURE 3). Some analysts have suggested that the US labor market may still be about 7 million workers short of pre-pandemic levels and that early retirements and resignations are likely causing further labor shortages.8



US Monthly Job Creation in the Last Year

As of 12/2/22. Source: Bureau of Labor Statistics


Sticky Rents and Housing Costs

As far as rents and housing costs, there’s some good news and bad news. On one hand, rents are up 23.5% over where they stood in the months before the COVID-19 pandemic. On the other hand, rent growth has now been slowing since March 2022 and is now in the single digits, rising only 4.7% in October.9 Still, rent inflation could continue to be sticky for some time.


Rents rarely decline. Instead, they tend to stay the same or increase with each new lease agreement.


The majority of landlords said they would continue increasing rents in 2023. Most renters are locked into leases lasting a year or more. Besides, rents rarely decline; instead, they tend to stay the same or increase with each new lease agreement.

Homeowners’ costs are measured as if their mortgage payments were rental payments—what the CPI and similar measures call owners’ equivalent rent (OER). Together, rents and OER comprise nearly two-thirds of each month’s CPI report. Data from the rent and OER components are collected biannually; consequently, the housing-inflation numbers you read about today usually reflect what renters and homeowners were paying six months ago.

This could present a dilemma for the Fed’s inflation-fighting campaign—and for renters, too. Rents may be poised to drift down sometime in 2023, but the more the Fed raises rates, the more it could discourage rental construction, which, in addition to reducing overall growth, is likely to take new homes off the market and contribute to a housing shortage that keeps rents elevated.10


Investments for a Sticky-Inflation Era

What’s an investor to do during an era of persistent, sticky inflation? During much of the time since the Global Financial Crisis, interest rates were sitting near zero while growth-oriented companies were raking in profits. Investing in growth stocks during this time was an easy call. In recessions, fixed income often does a star turn as the asset class of choice. But now, many economists believe the era of accommodative central-bank monetary policies may be over and that interest rates are likely to stay higher as the Fed tries to make good on its promise of crushing inflation.

No asset class can offer complete protection. That said, financial professionals generally suggest taking a look at the following range of options for building a diversified portfolio that can offer the potential for either modest growth or protection from persistent inflation (FIGURE 4).



Asset Classes That Benefited During Past Periods of Rising Inflation
Average returns during eight inflationary periods since 1970

Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. See below for representative index definitions. For illustrative purposes only. Note: Historical data unavailable for some asset classes. Rising core CPI periods, which do not include food or energy prices, defined as increases of about 1% or more. Eight time periods shown in chart are: 1973-1975, 1977-1980, 1983-1984, 1987-1991, 1999-2001, 2003-2006, 2010-2012, 2020-2022. Source: Hartford Funds as of 11/30/22.



Talk to your financial professional to make sure your portfolio is prepared for structural inflation.


Index Definitions

Commodities are represented by the Bloomberg Commodity Total Return Index, an index composed of futures contracts and reflects the returns on a fully collateralized investment in the BCOM. This combines the returns of the BCOM with the returns on cash collateral invested in 13 week (3 Month) US Treasury Bills. High Yield Bonds are represented by the Bloomberg US Corporate High Yield Total Return Index, an unmanaged broad-based market-value-weighted index that tracks the total-return performance of non-investment grade, fixed-rate, publicly placed, dollar-denominated and nonconvertible debt registered with the Securities and Exchange Commission. International Stocks are represented by the MSCI World ex USA Index, a free float-adjusted market-capitalization index that captures large- and mid-cap representation across developed-markets countries excluding the United States. MSCI performance is shown net of dividend withholding tax. Investment-Grade (IG) Corporate Bonds are represented by the Bloomberg US Corporate Index, a market-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more. Treasury Bonds are represented by the Bloomberg US Treasury Index, an unmanaged index of prices of US Treasury bonds with maturities of one to 30 years. US Large Value Stocks are represented by the top 30% of the top 1000 US stocks based on a value score that equally weights multiple valuation metrics to arrive at an aggregated valuation metric. Valuation metrics include: Earnings Yield, Operating Cash Flow/Enterprise Value (EV), EBITDA (earnings before interest, taxes, depreciation, and amortization)/EV, Sales/EV, Dividend Yield, and Equity Yield. US Large Growth Stocks are represented by the top 30% of the top 1000 US Stocks based on 50% year-over-year total earnings growth and 50% year-over-year revenue growth. US Small Cap Stocks are represented by the US universe of small-cap stocks as identified by US stocks between the 85th and 98th percentiles of market cap. TIPS are represented by the Bloomberg US Treasury Inflation-Linked Bond Index (Series L), which measures the performance of the US Treasury Inflation-Protected Securities (TIPS) market. Federal Reserve holdings of US TIPS are not index eligible and are excluded from the face amount outstanding of each bond in the index.

CNBC, “Payrolls and Wages Blow Past Expectations, Flying in the Face of Fed Rate Hikes,” 12/2/22.

The Consumer Price Index in the US is defined by the Bureau of Labor Statistics as a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

US Bureau of Labor Statistics.

US Bureau of Labor Statistics.

Federal Reserve Bank of Atlanta, 11/10/22.

Federal Reserve Bank of Cleveland, “Economic Commentary: Are Some Prices in the CPI More Forward Looking Than Others? We Think So,” Michael F. Bryan and Brent Meyer, 5/19/10.

Investopedia, “Sticky Wage Theory: Definition and Importance in Economics,” 11/30/20.

Barron’s, “Inflation Is Sticky, Structural, and Hard to Solve,” 8/12/22.

CNBC, “Rent Growth Slows to the Lowest Level in 18 Months,” 11/17/22.

10 The Atlantic, “Why the Rent Inflation Is So Damn High,” 8/18/22.

Important Risks: Investing involves risk, including the possible loss of principal. • Investments in the commodities market may increase liquidity risk, volatility, and risk of loss if adverse developments occur. • Small-cap securities can have greater risks, including liquidity risk, and volatility than large-cap securities. • Different investment styles may go in and out of favor, which may cause a fund to underperform the broader stock market. • Fixed income security risks include credit, liquidity, call, duration, event and interest-rate risk. As interest rates rise, bond prices generally fall. • Investments in high-yield (“junk”) bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. • The value of inflation-protected securities (IPS) generally fluctuates with changes in real interest rates, and the market for IPS may be less developed or liquid, and more volatile, than other securities markets. • Obligations of U.S. Government agencies are supported by varying degrees of credit but are generally not backed by the full faith and credit of the U.S. Government. • Foreign investments may be more volatile and less liquid than U.S. investments and are subject to the risk of currency fluctuations and adverse political, economic and regulatory developments. These risks may be greater, and include additional risks, for investments in emerging markets.

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