No change. The Bureau of Labor Statistics reported overall inflation unchanged from last month, with a rate of 3.2% year over year. This was lower than expected, which financial markets cheered as it may mean the U.S. Federal Reserve (Fed) is done increasing interest rates to curb inflation levels.

Change. The U.S. stock market appreciated +6.25% over the past ten days, ending 11/15/23. This is a big advance in a short time. From a historical perspective, an advance of this magnitude or greater only occurs about 2% of the time.

Deflation on the Horizon?

Deflation? It is not even Black Friday yet and Walmart’s CEO is suggesting that we may be headed to deflation.

On Thursday, Walmart CEO Doug McMillon said, “In the U.S., we may be managing through a period of deflation in the months to come.” This comment made headlines as retailers and consumers ready themselves for the coming holiday season.

Keep in mind that, at Walmart, grocery prices are elevated 15-20% from two years ago. McMillion also said, “The pockets of disinflation we are seeing are helping [the consumer], but we like to see more, faster,” speaking to the company's brand as a low-cost retailer.

3 Terms Worth Knowing

Disinflation.
From a consumer price index (CPI) perspective, the inflation rate is falling but still positive (currently +3.2% year over year). We are here, probably. Prices are going up, just less than they used to.

Deflation.
Looking at CPI again, in this case the inflation rate is less than zero. This does happen, but not often. The 1920s and ‘30s were significant, establishing a low of -15.79% inflation —deflation in other words. We saw deflation more recently in 2009, but only by -1.48%.

Inflation.
This one may be more top of mind. Inflation is the gradual increase in the prices of goods and services over time. When inflation occurs, each dollar you have buys you less than it did before. One of our core tenets is that investing for the future requires owning assets that can outpace inflation.

When CEO McMillion talks about entering a deflationary period, he may be on to something; after all, Walmart has its hand on the consumer’s pulse. That said, it’s hard to predict if the U.S. will actually enter a period of price declines (deflation) beyond a few hand-picked gifts for the kids or the price of eggs.

Second-order Effects of Deflation

While deflation might seem like a welcome break from inflation, its economic impact is mixed. Lower prices can benefit consumers by allowing their dollars to go further. However, deflation can have adverse effects on businesses, as falling prices can lead to reduced profit margins and even layoffs. Furthermore, if consumers expect prices to continue dropping, they may delay purchases, which can dampen economic growth.

Vector’s Perspective

At Vector, we to focus on multi-bucket, multi-year planning and investment strategies. Entering a deflationary environment could lead the Fed to spur the economy, again. This could result in lower interest rates and potentially higher asset prices.

In the short term, financial markets are driven by a range of factors, including sentiment, speculation, and short-term news events. Prices can fluctuate rapidly and seemingly without much connection to the underlying fundamentals of companies or the broader economy. In the long term, the focus shifts to fundamentals. We encourage investors, including retirees living off their portfolios, to take a long-term view, focusing on their investments' underlying strength and potential.