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Friday, October 14, 2022

Today's newsletter is by Julie Hyman, anchor and correspondent at Yahoo Finance. Follow Julie on Twitter @juleshyman. Read this and more market news on the go with Yahoo Finance App.

Inflation came in red-hot again on Thursday, meaning the Federal Reserve will almost certainly raise interest rates by at least 75 basis points at its next meeting, and possibly also in December.

That’s now the base case from Wall Street after the core consumer inflation reading Thursday showed the biggest year-over-year increase since 1982 in September.

But a growing chorus of investors says the Fed should not base its rate hike decisions on lagging indicators like the Consumer Price Index (CPI) and the unemployment rate. Instead, these investors say, the Fed should heed forward-looking indicators such as the prices of commodities like gold, which show easing inflation.

“The CPI that we got is a lagging indicator. It always is a lagging indicator," Ark Invest founder and CEO Cathie Wood told Yahoo Finance on Thursday. "And we’re seeing a lot of prices in the pipeline that are falling."

While Wood made her name by betting on innovative investments like Tesla (TSLA) and bitcoin (BTC), she has a background in macroeconomic analysis. She thinks the Fed is on the wrong track.

This week, the maverick investor wrote an open letter to the Fed flagging her concern that the central bank is making a “policy error” by raising rates. The Fed aims to ease inflation, but she contends that its actions might overshoot and spur deflation.

Michael Darda, chief economist and chief strategist at MKM Partners, also cautions the Fed against continuing down its hawkish path.

“They are on the cusp of going too far, and way too fast,” he told Yahoo Finance Live. “They should really be slowing down the pace of hikes now, not reacting, in a panicky fashion, to deeply lagging indicators. That is a prescription for an accident.”

Of the various lagging indicators, Darda says rent can dawdle more than others.

“Sticky core inflation measures like rents will tend to follow the economy by five quarters,” he said. “That means the strength here could simply be a reflection of how the economy was doing 15 months ago.”

And what are the forward-looking inflation indicators we should watch?

Both Wood and Darda point to the drop in commodity prices, with Wood flagging the decline in gold in particular as a good proxy for inflation. “Gold is a leading indicator of inflation,” she said. “And it has not broken out. It is breaking down.”