US inflation has climbed to its highest rate in 40 years as the headline Consumer Price Index (CPI) has climbed by 8.6% over the past year, putting pressure on the U.S. Federal Reserve to further tighten policy to restore price stability.

Core CPI, which excludes food and energy, appears to have peaked as the inflation rate on durable goods comes down. Nonetheless, the run rate remains higher than expected as higher costs for commodities and services continue to rankle the markets and put pressure on the Fed, Brian Levitt, global market strategist at Invesco, wrote in a recent insight. 

“Our outlook calls for inflation to moderate over the course of the year driven by base effects and slowing consumer demand, but we recognize that the risks to that call are elevated. We are comforted by the recent moderation in goods prices but recognize that service and commodity inflation remain stubbornly high,” Levitt wrote.

The markets, since mid-March, have been signaling that the economy is in more of an expansionary phase. However, the economy is likely to slow as the Fed tightens its policy.

“In the slowdown phase of the cycle, we still modestly favor equities but recognize that volatility persists amid policy uncertainty, returns become more modest, and the range of outcomes within equity indices becomes more extreme. We would expect higher quality businesses with pricing power and greater visibility of earnings to likely outperform as financial conditions tighten,” Levitt wrote.

Investors looking to maintain broad exposure to the U.S. market may want to consider the Invesco S&P 500 Equal Weight ETF (RSP), which weights each of the 500 holdings equally, around 0.20%.

The S&P 500 EWI outperformed the S&P 500 by 0.8% in May, a continuation of the 2% outperformance demonstrated in April. Key performance contributors for equal weight were the underweight to technology and the overweight to energy, according to S&P Dow Jones Indices.

This momentum is continuing from a strong first quarter, in which the S&P 500 EWI outperformed the S&P 500 by 2% during the first three months of the year, according to the S&P Dow Jones Indices U.S. Equal Weight Sector Dashboard

With quarterly rebalances to maintain equal weightings, RSP’s methodology imposes a strict “buy low/sell high” discipline, trimming allocations to companies that have grown and increasing allocations to companies that have underperformed, according to Invesco.

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