New data for how inflation trended in September is scheduled to come out Thursday morning, and it could have several big ramifications for the stock market and for Social Security recipients.
Inflation has been at the center of the market's attention this year. It has led the Federal Reserve to turn hawkish in a hurry and commence three consecutive jumbo 0.75-percentage-point interest rate hikes that have crushed stocks and led many investors to fret over the possibility of a severe recession.
Inflation has greatly increased the cost of living for retirees who receive Social Security benefits, but it could also lead to one of the largest increases in Social Security payments in more than 40 years. Let's take a look at how both investors and retirees could be affected tomorrow.
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A potential big move for stocks tomorrow
Rising interest rates have crushed stock prices, increasing the cost of debt for companies and reducing the future value of their cash flows. Many investors also still think company earnings estimates are too high right now and that businesses are not likely to fare well in a deep recession.
All of this means that the longer rates rise, the more trouble stocks could encounter. Fed Chairman Jerome Powell has made it clear that the Fed will not rest until it has won its war with inflation. Investors want to see clear evidence that consumer prices have peaked and might start to either slow their growth or head downward.
One way investors gauge inflation is through the Consumer Price Index (CPI), which tracks the prices on a market basket of consumer goods and prices. The CPI rose a staggering 9.1% in June. In July, it remained unchanged from June, sparking a rally in stocks, but then in August, the CPI ticked up slightly, sending stock prices downward.
Bloomberg is currently projecting the CPI to have risen 8.1% year over year in September, which would be an improvement from August. However, Bloomberg is also projecting a monthly increase in the CPI of 0.2%. That would be the highest monthly move in three months, which is likely not what the market or the Fed wants to see.
If the CPI comes in above these projections, I do not think stocks will fare well tomorrow. But if the CPI beats these forecasts and comes in below them, that might temper the market's expectations over another 0.75-percentage-point rate hike in November and spark a rally.
Finalizing the Social Security COLA increase
The Social Security Administration (SSA) calculates the cost-of-living adjustment (COLA) by looking at inflation data from the third quarter, which includes the months of July, August, and September, and compares it to third-quarter inflation data from the prior year.
Instead of the CPI metric the broader market watches, the SSA uses a similar index called the CPI for Urban Wage Earners and Clerical Workers (CPI-W). Tomorrow, the SSA will have the September number, allowing them to complete the calculation and finalize the COLA.
Based on July and August numbers, experts are currently projecting a COLA increase in the 8.5% to 9% range. With the average monthly retired worker's Social Security benefit check currently around $1,679.54, a 9% bump would increase the monthly check by $151.16, or about $1,813.90 per year.
Because I'm expecting a slightly lower CPI-W number for September, I'm not sure retirees will see that full 9% bump, but it will likely be higher than 8%, which is still a big increase. Plus signs of lower inflation would likely help most people right now.
Prepare for a big day
Whether you are an investor or a retiree who claims Social Security, it's likely to be a big day tomorrow.
Investors should be prepared for stocks to move in a big way in one direction or the other. Do not try and time the market tomorrow, because it's very difficult to do, and the market doesn't always act as you might expect. If you are investing with a long-term outlook and focusing on stocks with strong fundamentals, you have nothing to worry about if you remain calm tomorrow.
For retirees who receive Social Security benefits, tomorrow shouldn't come as much of a surprise, because we already can presume a COLA increase of between 8% and 9%. If inflation data comes in higher than expected, your benefits will increase by more next year.
If it comes in lower, the increase might be more toward 8%, but that's not all bad because it means inflation could be starting to abate. Plus an 8% increase in benefits is still quite hefty, all things being relative.
