Persistent Inflation, More Rate Hikes by Fed

Shelter category prices carry the most weight, accounting for nearly a third of the CPI. Increasing interest rates will impact mortgage approval rates, slowing this section of the US economy further. 

The next-bigger category, food, accounts for around 14% of the CPI are rising. The Russo-Ukraine war has put considerable pressure on food and energy prices. The Russian invasion disrupted exports, causing a rise in global food prices. Energy prices which account 8% of CPI,  have significantly increased and expect to remain volatile for quite some time. 

Supply chain disruptions used to be a big part of the inflation narrative in 2021 and 2022. Many of these constraints have since resolved themselves as the global economy slows, with the price of everyday items dropping. 
The impact of a strong US dollar may also help reduce inflation in 2023 by making imports cheaper. 

The Fed is still clinging to its target of bringing inflation down to 2%. Current interest rates sit at a target 4.5% to 4.75% range. The full effect of the interest rates’ staggering climb has yet to be seen which will lead to fewer jobs and less spending. With the slowing economy, it is likely to bring the yearly inflation rate down to roughly 3.5%-4.0% by the end of 2023.

This lowered inflation rate, however, is still higher than the 2% target which might lead Fed to foregone growth and perhaps allow the possibility of a mild recession. Fortunately, the chances of a recession in the near term may be reduced with China’s quicker-than-expected re-opening, lower European gas prices, and robust US job growth. This should also make core inflation more persistent in the grip of a still-resilient economy, however, paving the way for additional rate hikes. 

With the Fed extremely tough stand in fighting inflation, I shall focus on more defensive strategies and areas that could outperform in the event of a recession. Healthcare stocks (   $CVS Health(CVS.US)$ $Pfizer(PFE.US)$  ) would be a good option, in my opinion as medical needs are always in demand regardless of the economic situation.