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What the Latest Inflation Numbers Really Mean: OneDigital’s Chattopadhyay

Industry Trends and Research

Saumen ChattopadhyayRelatively good news broke Thursday with the release of the latest inflation data. Although the Consumer Price Index rose 6.5% in the 12 months through December, it was the smallest monthly increase since October 2021.

Excluding food and energy, core inflation rose 5.7% over the same period, the smallest advance in a year. This decrease in the rate of inflation growth has many wondering if we’ve turned a proverbial corner.

“Economists and the markets believe the inflation is following a downward trajectory compared to last year when they struggled to come to terms with what was going on,” Saumen Chattopadhyay, Chief Investment Officer with OneDigital R+W explained. “Nevertheless, service prices, including shelter costs and rents, still show an increasing trend, and there are still concerns that wage growth will feed into prices in the services sector, keeping the inflation elevated until the labor market softens.”

The latest figures give the Federal Reserve room to further “downshift” the pace of rate hikes to 25 basis points at the Jan 31st meeting, Chattopadhyay argued. He expects the Fed Funds rate to peak at the terminal rate of 5% in March before pausing for the rest of the year, given the possibility of a soft landing.

“We believe the markets would continue to be volatile given the anticipation of soft landing to a recession,” he said when asked about the impact on sequence-of-return and some of the other retirement risks associated with inflation and volatility. “Nevertheless, in 2022, we had anticipated rising equity volatility and double-digit weakness, and we expect 2023 to include recoveries and present opportunities with most central banks ending their tightening cycles.”

However, the impact of higher rates will weigh on economic growth, he added, and while inflation has peaked globally, it will likely stay higher for longer. He believes a “choppy uptrend” is likely in 2023, and a severe global recession would increase the correction risk and volatility.

“Our message to clients is to remain calm but understand markets could remain volatile,” Chattopadhyay concluded. “There is an elevated risk of recession, but it is not a foregone conclusion. There are still odds of a soft landing and recovery. [Plan] participants are reminded that time in the market is more important than timing the market.”

Elevated Recession Risk

The elevated recession risk is weighing on plan sponsors and advisors. A survey released Thursday from small business 401(k) provider Ubiquity Retirement + Savings found 61.9% of sponsors and 57.4% of advisors are concerned about how a recession may impact the performance of 401(k) plans in 2023.

Worries about inflation and poor investment returns also ranked high for both groups.

In response to the concerns, 80.3% of plan sponsors expect to maintain their employee match. The company added that advisors predict little to no change in 401(k) contributions, loans, and risk appetite for clients in 2023.

While plan sponsors and advisors believe more rate hikes are on the way, they split on their inflation outlook. 6.4% of advisors expect inflation to be lower by the end of 2023, while 57.3% of plan sponsors expect inflation to be higher at the end of 2023 versus Q4 2022.