Consumer Price Index (CPI) data was released yesterday and it’s a doozy.

In case you missed it… the CPI climbed to 9.1%. That’s a 41-year high.

Not only is inflation at a four-decade high, but the momentum with which it has happened has the Fed scrambling for answers.

The increase in consumer prices in June pushed the rate of inflation over the past year to 9.1%. 

This increase was higher than the “experts” had predicted. 

The cost of energy, mainly oil and gas, shot up 7.5% in June and accounted for half of the increase in the cost of living. The average price of a gallon of gas in the U.S. topped $5 for the first time ever.

If there’s any good news, it’s that oil prices have fallen sharply to around $96 a barrel from as high as $122 in early June. 

Prices at the gas pump are still high but beginning to fall.

Food prices climbed 1% last month and there’s little sign lower prices can be expected. Grocery prices have climbed 12.2% in the past year, which marks the biggest increase since 1979.

Then there are rentals – the cost of rent rose 0.8% in June, that’s the biggest monthly gain since 1986. 

Rents have risen 5.8% just in the last 12 months alone – the highest in 36 years.

Investors and casual readers will also hear about something referred to as the “core rate of inflation” – not to be confused with CPI. 

You see, “core inflation” omits food, energy, housing, and some transportation costs. 

Core inflation was also above Wall Street’s forecast, but the increase in the core rate over the past year slowed to 5.9% from 6% in May.

The Fed views the core rate as a more accurate measure of future inflation trends because gas and food prices tend to go up and down quickly and usually don’t stay high for very long. 

For me, I think the core rate of inflation is nonsense. 

Eliminating food, transportation costs, and housing may look better politically, but it means very little to the average person that is trying to pay rent and feed a family.

So what does all this mean for investors?

Inflation has not peaked yet.  

Interest rates are still going up, and recession warnings will keep coming across media outlets, which will lead to more volatility in the weeks and months ahead.    

Stocks opened yesterday’s session down sharply on the news, although markets bounced from those lows by the close of trading.

This morning, the S&P 500, DJIA, and NASDAQ are all set to open the day trading down more than -1% to -1.5%. 

Expect volatility.

With higher prices for everything ranging from fuel to food to rent, it’s likely the Fed will take an even more aggressive stance than they have previously in their fight against inflation by raising rates more aggressively.

It appears the Fed has no choice but to follow through on a more aggressive rate-hiking policy, which will put more pressure on consumers and the economy, and raises the probability of recession next year.

As a matter of fact, according to some analysts, the Fed could raise rates by as much as 1% when they meet on July 27.

So let me explain the challenge here…

The Fed uses interest rates as a tool to slow the economy – in this case to cool it off – by raising rates.

They hope to tame inflation by slowing consumer demand, but if the Fed goes too far, they can slow the economy so much that we fall into a recession.

In a perfect world, the Fed can control inflation, while keeping us out of a recession.

That’s what you’ll hear referred to as a “soft landing,” but I’ll tell you, the Fed doesn’t have the best track record when it comes to soft landings…

So buckle up… things might get rough for a while.

And be prepared to hear earnings revisions galore because with inflation comes higher production costs for companies. Higher production costs cut into profits. Lower profit expectations lead to lower stock prices.

If Fed policy is too aggressive in its efforts to slow inflation, we’ll end up in a recession. And if we enter a recession and consumers get squeezed, they stop buying… and when consumers stop buying, companies don’t have anyone to sell to.

In order to entice buyers back, corporations will discount prices just to move inventory, even if it’s at a loss. All this leads to lower profit margins and ultimately lower stock prices.

This is obviously an oversimplification of what happens, but if we find ourselves in a recession (and it looks more likely with each passing day), you may see your portfolio value fall further than it has already in the first half of 2022.

So, if you haven’t already taken steps to protect your capital, get going, because it’s better late than never at this point.