Will Slower than Forecasted CPI Change the Fed’s Decision on Interest Rates Increment?

December 15, 2022

By Published On: December 15, 2022Categories: Market UpdatesTags: , Views: 137

On 13 December 2022, the Consumer Price Index (CPI) reported for November was 7.1%. It was 0.6% lower than the previous month and 0.2% below the forecasted CPI. The market has been inching downward to the rising interest rates environment for the past few months. However, there were positive reactions from the market. Both the S&P500 and Dow Jones Index rise in anticipation of good news from the Federal Reserve Board.

So, what exactly is the relationship between Fed Fund Rates and the Consumer Price Index (CPI)?

What is the Consumer Price Index (CPI) and its relations with rising interest rates?

The Consumer Price Index (CPI) measures the average change in prices over time paid by consumers for a basket of goods and services such as food, clothing, and transportation. The CPI is used to calculate the inflation rate and is used by governments, businesses, and individuals to make inflation-adjusted decisions, which include adjusting for cost-of-living increases in wages and pensions. It is calculated by the US Bureau of Labour Statistics every month.

While the CPI averages at around 2-3%, it has gradually increased to more than 5% since May 2022. In general, a higher CPI indicates that the economy is experiencing inflation. As such, the continued rise in the CPI is worrying, with the Federal Reserve implementing measures to ease the increase.

Rising Interest Rates | screenshot of US consumer price index CPI YoY by Investing.com

US consumer price index CPI YoY

Source: Investing.com

The Relationship between CPI and Fed Fund Rate

The Fed Fund Rate is the interest rate at which banks lend reserve balances to other banks on the federal funds market. While the two metrics are not directly related, they are influenced by similar factors and can impact each other in certain ways. The Federal Reserve can use its monetary policy tools like changing the federal funds rate to control inflation measured by the CPI. When the CPI is rises too quickly, the Fed may decide to raise the federal funds rate to help cool down the economy and bring inflation back to its target level.

In the past six months, the US Federal Reserve has gradually increased the rates to 4% to tame inflation rates. On 14 December 2022, the Federal Open Market Committee (FOMC) will decide on the next interest rate increment. The forecasted increment rate is 0.5%, but with a lower CPI, the Fed might make a slight adjustment to their plans.

Rising Interest Rates | FED Interest Rate chart

Feds Interest Rate Chart (Source:Investing.com)

2 companies to look out for in rising interest rates environment

Most of us would have experienced an increase in the prices for our daily necessities like food, beverages, and household items. Such prices are adjusted to reflect the increase in production costs. Despite the dip in CPI, some companies might continue to charge their items based on the decision made by the Fed. In other words, they might enjoy more profits from the price increase.

1. Costco (Nasdaq:COST)

Costco is a membership warehouse club (big-box retail stores) which offers its members the best possible price on their retail products. Concerns that the company may not be able to keep up with inflation caused its stock prices to fluctuate for a while, but the lower CPI is a reprieve to the company. Currently, the stock price of Costco is fairly valued.

Companies to look out for in rising interest rates environment | Cotsco Financial Analysis

Cotsco Financial Analysis (Source:GoodWhale)

2. Performance Food Group (NYSE:PFGC)

Performance Food Group is the third-largest food service distributor in the US, right behind SYSCO and US Foods. Foodservice, Vistar, and Convenience all fall under the PFG umbrella. Each subsidiary addresses the needs of various clients ranging from restaurants, hotels, campus retail, convenience stores, vending & micro-markets. The company has enjoyed excellent growth since the beginning of the pandemic and has plans to continue expanding. Today, the company’s stock price is also at fair value. 

Performance Good Group Company Analysis

Performance Good Group Company Analysis (Source:GoodWhale)

While rising interest rates can affect the business trajectory of companies, don’t forget to also keep track of the company’s progress. Be aware of the latest company developments as well as its track record to learn more about their growth of equities portfolio. 

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