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Jeremy Owens: Hello and welcome to On Watch by MarketWatch. I’m Jeremy Owens. Inflation has been slamming our wallets for three years now, pushing the prices of many goods and services higher by more than 20%. The economy has weathered the storm, but Americans aren’t feeling so rosy as their bills continue to rise. Today we’ll talk about what is more expensive and why. Then we’ll take a look at one area where inflation has indirectly helped produce a better opportunity, bonds. With the Federal Reserve keeping interest rates at their highest point in nearly two decades to combat inflation, savers have the chance to invest in vehicles that were largely forgotten in the low interest rate environment of recent years. We talk about how to take advantage of this opportunity with no fees or taxes, thanks to a website that looks straight out of the ’90s. Plus we’ll take a quick look at the news stories we are watching right now and how they will affect your wallet. First, let’s talk about inflation.
If you bought some chocolate for your Valentine this week, you might’ve noticed a higher price tag. That’s what caused cocoa, the base ingredient of chocolate, is hitting its highest prices ever recorded. And that’s quite a feat concerning records go back to 1959. Sugar is also experiencing a surge in price, rising 40% at times last year. And a big cause for both of those is the weather. A hot and dry season in West Africa has curtailed cocoa production, while lack of rain in India and Thailand affected the sugar industry. But we can’t blame just the weather for everything costing more. A preponderance of factors have led to rising prices across the world in recent years. And just as cost increases normalize in one area, they’ll pop higher in another. This game of economic whack-a-mole has been happening for nearly three years now.
On Tuesday, the Consumer Price Index or CPI, showed the rate of inflation in January stayed higher than 3%. And that was unwelcome news for the Federal Reserve, which would like to see it fall lower before cutting interest rates. MarketWatch reporter Jeffry Bartash has been tracking the effects of inflation over the years and joins us now to discuss which prices are higher and what’s keeping inflation from falling to the Fed’s target range.
So Jeff, we’re now reaching nearly three years of elevated inflation. We haven’t had a reading below 3% since March of 2021. And that time we’ve seen different things, experienced price increases at different times, but over the total period, what categories of goods and services have you really seen increasing the most in price?
Jeffry Bartash: Well, everything has pretty much gone up in price, but most Americans are paying a lot more for the staples of things they have to buy every day or every week. The cost of rent, for example, is up 20% versus four years ago. Gasoline, 22%. Groceries, every several times a week I go to a grocery store, that’s when I really noticed the sticker shock. Grocery prices are up 25% compared to four years ago. You can go on and on, whether it’s coffee or butter or bread or flour, cable TV, car insurance. Car insurance is up almost one-third. People are really getting hammered these days by really high car insurance rates. Sporting events, up 42%. Daycare, 16%. So everywhere Americans go, they’re facing higher costs.
Jeremy Owens: And we’re seeing other economic readings look really strong, but not consumer confidence. It’s not growing. And a lot of that tends to fall back on these higher prices. While wages have increased, they seem to be going right back into everything you need to buy every week.
Jeffry Bartash: They are. And for some people, if you pay more for medical costs than the average family or you pay more if you’re a renter instead of a homeowner with a low mortgage rate, then in most cases what you’re paying is probably not keeping up what you’re getting in wages or salary increases every year. Supposedly the average wage in this country is actually slightly ahead of inflation for the last four years. But that’s simply not true for everybody and it all depends on what your expenses are. Even so, people aren’t used to this kind of high inflation. We haven’t experienced high inflation like this since the 1980s. And it’s just very unsettling for people when every day, every week or every month they go to a store and they see prices are higher than they were before.
Jeremy Owens: And economists really expected that the reading we got on the Consumer Price Index this week to finally see inflation dip below 3%. But it didn’t get there, it was at 3.1%. What factors now are really keeping that number that high?
Jeffry Bartash: Well, the good news is that inflation on some things like say gasoline have actually reversed themselves and food prices, which were rising very sharply a couple of years ago, they’ve actually tempered and come down, they’re not rising all that much. Inflation is really hitting two parts of the economy. Cost of housing, whether you’re a renter, you’re going out to stay at a hotel or you’re renting a home or you’re buying a home. Prices for rents have rose sharply for a couple of years. Prices for homes are still going up even though mortgage rates are 6%.
So the cost of shelter, and that’s a huge part, that’s the biggest single expense for most families is the cost of shelter. So that’s one big source of inflation. Now, the other big source is wages. Now, when inflation’s rising, naturally workers want more money because if they don’t, they’re going to fall behind. But when wages rise rapidly, that can also contribute to inflation and keep inflation higher. That’s the Fed’s biggest worry. They want people to get wage increases, they want people to get higher salaries, but not so high that it makes inflation harder to get back down out.
Jeremy Owens: Wages increasing contribute to inflation because employers need to make up the money they’re paying out. In some ways, they tend to raise prices. And that’s just one way it feels like all of these factors are feeding into one another right now. So how do we get out of this cycle? Because the Fed isn’t going to bring down interest rates until we see inflation really decline.
Jeffry Bartash: Well, inflation has slowed quite a bit in the last year or two, and a lot of that’s because the inflation burst we had 2021, 2022 was tied to the pandemic. Now that the pandemic’s over, a lot of things are returning more closer to normal. As you mentioned, there’s been a feedback loop with wages and housing prices. And those things should diminish over time if inflation continues to slow and if the economy slows a bit, cools off a little bit more. The Fed doesn’t want a recession. It just doesn’t want things to be so hot because think of it this way, if companies have to go out and have to spent a lot of money to get people to come work for them, obviously that’s going to push up inflation. But if the economy slows a bit more, companies, they’ll still need workers, but they won’t need as many. It’s not like a bidding war for labor or for groceries or for gas or anything else. What the Fed is trying to do is just slow the economy now so that there’s not a bidding war for everything that keeps prices high.
Jeremy Owens: Yeah. But that’s a very hard thing to do. Is there anything to look for that would suggest that inflation is headed toward the Fed’s target?
Jeffry Bartash: It’s always hard to say in the moment where inflation is headed. The January report is often a tricky one because a lot of companies raise prices at the beginning of the year. The government tries to adjust for that, but sometimes it gets it wrong. So I’m not too worried about the January number, I’m more worried about the trend. And we’ll get more information in the next couple of months that’s going to tell us one way or the other. Inflation is going to slow and drop below 3% or it’s not. And if it doesn’t, yeah, then the US economy is in trouble and the Fed has a tougher job on its hands. On the other hand, if inflation does drop below 2%, 3%, it’s likely to continue to decelerate and obviously that would be good news for the economy and the idea of avoiding a recession.
Jeremy Owens: The target for the Fed is really 2%, right? They want to see inflation drop down to at least that general area.
Jeffry Bartash: Yeah. The way to think about it is in a decade before the pandemic, inflation averaged somewhere between 1.5% to 2% a year. Now most people, when they’re going about their daily lives, they’re not thinking about it. What Americans want is they don’t want to see prices change much. So what the Fed wants is the kind of inflation nobody notices. If you’re not noticing as a consumer prices rising very much or at all, that’s what you want. That’s what people want. People want to know when they go to the store, prices aren’t going to be much different than they were a week, a month, a year or two years ago.
Jeremy Owens: But that’s pretty impossible now. We’ve seen prices increase so much over the last couple of years and that’s what we’re experiencing right now. Inflation is decreasing, but that means prices are just increasing at a lower rate. Those increases that already happened in the last three years, they’re not going anywhere.
Jeffry Bartash: No. Inflation has only been negative once since 1960, so people shouldn’t expect prices to fall and go back to where they were several years ago. The only way we get out of this is if wages increase slightly faster over the next couple of years than they normally would have, so that wages get to a level where what people are spending their money on now is similar to what they were spending several years ago. This is why people are so upset is inflation might be slowing, prices are still much higher for most things compared to four years ago.
Jeremy Owens: And how does the Fed look at this now? We came into this year with investors and economists hoping for a March rate cut. Everything we’ve seen so far from the economy early in 2024 suggest that’s not going to happen. Those expectations got pushed to May, but this report seems to be pushing that out even farther, maybe even to the second half of the year.
Jeffry Bartash: It’s possible, but I’ve seen the markets go back and forth and the Fed officials go back and forth the last couple of months. It’s always very hard to say when the Fed’s going to cut rates. Oftentimes the market forecasts are wrong. If I had to guess, I would say the Fed is likely to cut rates sometime in the summer. But I don’t think the Fed is going to cut rates very quickly until they’re convinced that inflation is either heading toward 2% or getting close to that target.
Jeremy Owens: And this means people will continue to contend with inflation moving forward. So we’ll continue to talk about it. We’ll have you back. Thank you so much, Jeff.
Jeffry Bartash: My pleasure.
Jeremy Owens: We’re going to take a quick break. Coming up, the investing opportunity that higher interest rates provide. Stay with us.
Welcome back to On Watch by MarketWatch. Before the break, we talked with Jeffry Bartash about the effects of inflation and why it could keep interest rates higher. But now we turn to a potentially positive effect of those higher rates. After Tuesday’s inflation reading, rates on treasury bonds shot higher, which has become common in recent months. When MarketWatch and other financial news organizations report on this phenomenon, you may notice a bit of fear in the coverage. That’s because we tend to talk to professional bond traders who don’t like sudden swings in prices because of what they can do to the value of bonds they already own. But for everyday Americans, higher interest rates on government debt should signal opportunity, the chance to invest money in one of the safest investment vehicles historically.
When I have questions about bonds and other forms of debt, I go to Joy Wiltermuth, an editor and reporter on our markets team. She joined us this week to talk about how to take advantage of this moment. Now, Joy, there’s been a lot of, I would say, agita, unhappiness in the bond market recently after the most recent Fed Reserve meeting a couple of weeks ago. And a lot of that leads to scary words like recession indicator and inverted yield curve, which just means that long-term rates are lower than short-term rates. But that is taking what professional traders are seeing in the bond market. What should normal people take from what’s happening in the bond market right now?
Joy Wiltermuth: Well, the recession indicator, the inverted yield curve is still there and definitely Wall Street looks at that, traders look at that. And it has been a time tested signal that eventually we will get a recession.
Jeremy Owens: We’ve had a lot of time tested signals that indicate a recession over the past couple of years and we still haven’t had a recession.
Joy Wiltermuth: We certainly aren’t there. No. And they keep saying, well, this time is probably different because of the extraordinary shocks of the pandemic and the extraordinary bazooka of aid that we’ve gotten from not only the federal government but also what the Federal Reserve has done to help prop up markets. So this time is different, the metrics probably still matter, but the lag effects of when actually rubber hits the road, the recession isn’t here now.
Jeremy Owens: Yeah. But for people who are just looking to place money somewhere, really the inverted yield curve just means you’re getting better return on short-term treasury bonds than you are long-term treasury bonds. That’s really what it boils down to?
Joy Wiltermuth: Exactly. And why Wall Street scratching their head or maybe even portfolio managers, you run a bond fund, they’re like, “Oh, I’m so tired of people saying cash.” But also why wouldn’t you want to be in cash if it’s the first time in your investment lifetime for a lot of people that you can get 5% on cash. And that’s because the Federal Reserve has raised rates and that’s very painful on the borrowing side, but at the same time, 5% to be a creditor to the United States government, that feels pretty good.
Jeremy Owens: Yeah. When you say cash, people misunderstand this sometimes, when you say cash, it doesn’t mean you just take the money and stick it in a checking account. It is looking for these tax-free vehicles a lot of times like bonds that are paying a guaranteed rate and it’s less risky than stocks and other things that have a little bit more risk that you’ll lose some money.
Joy Wiltermuth: And it’s called cash because ideally, especially if you’re just investing your money for a month, it should be pretty liquid. So that’s another way cash and liquid investment cash-like is what it actually should be said. Is what it is, it’s a cash-like investment.
Jeremy Owens: Yeah. And these investments really were not worth looking into for almost 15 years as interest rates were low. And we’ve definitely seen over the last couple of years as interest rates were raised that people are seeing these investments as good again and jumping into them in a way that we haven’t seen for more than a decade.
Joy Wiltermuth: Right. And we don’t have to ask you, how old are you Jeremy? Or how old am I? But your grandparents probably bought you a savings bond maybe for your birthday or something like that. Sometime in your youth you had a savings certificate or something like that. We’re talking about traditionally you had been able to put your money in this cash-like investment, a savings account and earn 5%, a T-Bill and earn 5%. That was something that was available for a long time and that was considered investing for a lot of people for a very long time in this country. That obviously tremendously shifted after 2008 and rates got slashed to zero. And yes, they crept up a little bit, but then we had the COVID crisis and bam, they were slammed down to the ground again. So that environment were actually investing saving was somewhat synonymous, it went away.
Jeremy Owens: And that’s definitely changed now. We’ve seen a big inflow from normal investors, from households into these fixed interest rate type vehicles, especially treasury bonds and others. Right?
Joy Wiltermuth: Yes. Definitely. And I was just looking, I’m very fascinated with the amount of people that get invested in the treasury market through the TreasuryDirect, right through the government. So I’ve been asking and monitoring the monthly numbers, and as you can imagine, it’s a very clunky website. You will lose your password and have to call them during office hours to get it reset.
Jeremy Owens: Which I know has happened to you. This is a very 1990s website. It is definitely not the type of thing we’ve seen over the past few years with apps that spray confetti when you buy a stock. This is very much like the internet of old and the government still continues to run this website where you can buy bonds without any fees, without any taxes. It is very direct, just as the name suggests.
Joy Wiltermuth: It’s very direct and it can be very frustrating, but who doesn’t like free? You don’t have to have a brokerage account. You literally are setting up account with the government and you can buy as you like. Just very interesting to see. I was looking back at some of the monthly numbers back to 2019, maybe 17,000 new accounts were opened. That was the monthly cadence. And then spring 2020, lo and behold, when the Federal Reserve started to say, “Inflation isn’t transient and we’re going to have to raise rates,” and that kind of thing, you just saw 500,000 a month, 785,000 in new accounts into this, again, as we’ve described, very old website. And just people definitely said, “Well, let me do that for now. I’m so uncertain about is this rally real? Is this beer market real in stocks?” Obviously a lot of individual people decided, actually, I think that 5% on whatever treasury sounds pretty good to me for now.
Jeremy Owens: Millions of Americans jumped in a way that, again, we haven’t seen in more than a decade. How much money has really piled in from households into the bond market over the past year or two that you’ve tracked?
Joy Wiltermuth: Well, one way I guess you can look at it, just in the short-term exposure, the shorter term bills that pay off quite quickly. You can look at money market accounts because that’s essentially what they’re investing in, and you can see, they call it cash on the sidelines, and that’s tracked very closely by Wall Street just to see where sentiment is and where people are putting their money away. And we tapped $6 trillion a couple of months ago and just keep heading north from there. That’s a huge cash pile that we’ve just never seen. So we’re at a record level. What do we do from here? The Federal Reserve has said we’re probably going to have to keep rates longer for a while here.
Jeremy Owens: Higher for longer. Yeah. And that means you’re getting that good rate on your treasury bonds for a little bit longer. The professional traders who see rates raised go, “Oh no, we’ve got all of these longer term bonds at a much lower rate. This is horrible for us.” But for people who have some liquid money they want to put into something, it means you’re getting the chance to jump into a very safe investment at a good return that you have not had for many years.
The investment strategy a lot of people have employed here amid the inverted yield curve is to go ahead, and it’s even contributing to the inverted yield curve, is people are jumping on those one month, three month, six month rates that are above 5% right now instead of the 10 year, 30 year, longer duration bonds that are above 4%. And that’s something that has paid off for people and they’re getting that money back, but now you might want to think if you can lock money away for a longer time period, locking in those higher rates on the longer term and just having that money and getting that yield.
Joy Wiltermuth: Well, and to the frustration, yes, of some fund managers and probably financial advisors as well, they’ve said, I know that eventually the Fed will cut rates and at that time the advice is always you want to be able to think about a longer term commitment because then it’s a tenure for 10 years. You’ll know you’ll get the 4%, for example. So they definitely advise, “Don’t wait until the Fed cuts.” At the same time, that timeline from September until we don’t know when, maybe into the summer, there’s just more time to write it out in cash-like investments.
And you can see in the TreasuryDirect data, I like to look at it directly that tells me what individual people are doing, and there’s been an uptick again there in new accounts open. So it tells you, there’s definitely people interested in saying, “Well, let me have a bit of this now and maybe we’ll wait and see what happens in a couple of months.” At least one month or three months if that’s what you’re going for on the short end. But definitely 4% for 10 years. Again, that sounds pretty good though if you think about what was going on for the last 15 years in an environment where outside of calamity, not that many people think rates are going to go all the way down.
Jeremy Owens: And that’s a good way to balance. If you’ve got a 30-year mortgage at sub three and you can get a 30-year treasury bond at more than four, that’s the kind of arbitrage you can do right now that a lot of people who aren’t professional investors but are trying to save and make sure they’re making smart money moves. Those are the type of things you can do right now that can help you out. If you have other questions about how to get in the bond market, what you should realize, anything like that, please get in touch. Because we’ll just turn right back to Joy Wiltermuth. Thank you so much for joining us, Joy.
Before we go, it’s time for What We’re Watching, a look at the news you need to know for the rest of the week and beyond. After the latest CPI readings and stocks lower and bond yields higher, we’ll receive another inflation reading tomorrow. The Producer Price Index or PPI measures the effects of inflation on businesses more than consumers and will be another important factor on the Fed’s decision-making. And we earlier discussed that despite a strong economy, consumers aren’t that confident as inflation continues to take its toll. The next preliminary reading of Consumer Confidence will be released tomorrow morning as well, making this week crucial for determining where the stock market will head next. After a strong earnings report last week, Disney is still being hit from multiple fronts. Activist investors continue to pressure, CEO, Bob Iger. And Tesla’s CEO Elon Musk has continued to belittle the company on his X social media platform. It’s been nearly two years since Musk began his quest to own the company, formerly known as Twitter. A dramatic story we’ll talk more about next week.
And that’s it for this episode. Thanks to Jeffry Bartash and Joy Wiltermuth. To keep following the latest on inflation and the bond market, head to marketwatch.com. You can subscribe to this show wherever you get your podcasts, and please do. If you like what you heard, please leave us a rating or review. It really helps others discover the show. And let us know what you want to hear from us. You can reach us at onwatch@marketwatch.com. And if you’re a listener on Spotify, be sure to answer this week’s poll. The show is hosted by me, Jeremy Owens and produced by Metta Lutz-Hopt and Katie Ferguson, who also makes this episode. Melissa Haggerty is the executive producer. We’ll be back next week with a new episode and until then, we’ll be watching.
