As the labor market continues to improve and the Fed set to begin raising interest rates as early as this spring, inflation may be approaching its peak.
Inflation rose 7.5% year-over-year in January as measured by the Bureau of Labor Statistics monthly inflation report, representing the highest inflation increase in 40 years.
Though a multitude of factors contribute to the inflation the U.S. is currently experiencing, issues with the supply chain have been a significant contributor, says Eric Kuby, CIO of North Star Investment Management Corp.
“[The labor market is] really hot because of supply disruptions, you know, just a lot of problems related to the pandemic,” Kuby said in a recent interview with Yahoo Finance Live. “So I actually believe that the positive bullish case is that a lot of these issues that have really caused these inflationary pressures are going to abate as the year goes on. And that lower inflation data will allow for less aggressive Fed policy once rates get way off of 0, maybe close to 2% on the short end.”
January’s job report, released two weeks ago, revealed a strong labor market. A higher-than-expected rise of 467,000 jobs occurred, signaling healing in a job market which struggled with the Omicron variant in recent months.
With the labor market improving, the Fed may be more likely to be more aggressive in raising interest rates.
“The Fed is, I think, pretty clearly behind the curve,” Kuby said. “It has been for quite a while. And I do think that rates are going to continue to rise.”
As interest rates rise and inflation begins to subside, workers may see real wage gains. Wages have risen strongly since the pandemic, but high inflation has reduced any progress in real wages to this point. However, higher wages may persist after inflation slows, Kuby said.
“I mean, the thing about wage inflation, unlike the other areas of inflation, [is] that once you raise wages, it’s hard to go back,” he explained. “I talked with companies. I think we’re close to the end of the rising cost pressures. So I think that you’ll start seeing inflation getting less problematic over the next couple of months, although not immediately.”
Small-cap value stocks
Instead of pulling out money from investment portfolios and growing cash reserves, Kuby recommended investors explore small-cap value stocks.
“There’s a lot of really good companies with great balance sheets in the small-cap world that are— a lot of consumer stocks, a lot of industrial stocks that we think have gotten unreasonably inexpensive,” he said. “[These stocks are] great bargains after this big sell off. So we would encourage people to look at small-cap, particularly small cap value, which has been a really tough area, but I think is getting better this year.”
Ines is a markets reporter covering stocks from the floor of the New York Stock Exchange. Follow her on Twitter at @ines_ferre
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