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Slowdown Ahead

Mike Zaccardi

ARE YOU TRAVELING for the holidays? There’s good news for drivers. Average retail pump prices have dropped below $3.30 a gallon, with many states seeing prices under $3. This positive development for consumers—including those off to grandma’s house this season—comes as wholesale gasoline futures fall to their lowest level in a year.

Following Russia’s invasion of Ukraine in early 2022, and just in time for the busy U.S. summer driving season, gas prices notched all-time highs near $5 per gallon. Consumer sentiment soured and stock traders were carefully following energy prices. Now, gas prices are almost an afterthought. Instead, fears of recession are permeating Wall Street.

Inflation had been a top concern among portfolio managers, but I see that negative narrative quickly fading from the headlines in the coming quarters. Indeed, traders have priced in future annual inflation of just 2.2% to 2.3% over the next 10 years. Also encouraging was Friday’s University of Michigan preliminary survey of inflation expectations for the next 12 months. According to the report, the year-ahead rise in prices is seen at 4.6%, the lowest since September 2021.

The University of Michigan’s consumer expectations are important. They’re among the few inflation metrics that members of the Federal Reserve use to determine interest rate policy. If workers feel inflation won’t be a big deal in the upcoming year, they might be less inclined to demand a big raise. Wage growth is a so-called sticky source of inflation. The more it moderates, the less damage to the economy that the Fed will need to do.

This week, investors will pout if Tuesday’s inflation report comes in too high. Wednesday’s Fed interest rate decision will also move markets. As more signs point to a topping off in inflation, all eyes will instead turn to the quarterly corporate earnings season that begins next month.

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