Given the latest movement in the market, I thought it would be important to address inflation concerns.
Here you can see the Core CPI and CPI modeled together both rose sharply.
Like all data, you can use this to tell two different stories. People like to paint the target they like around the arrow that’s been shot.
Here is the first story:
Inflation is about to be out of control. “You can’t put this much money into the market and not have out-of-control inflation.” The problem is… we also said this in 2008 and it didn’t happen. This is the doom and gloom view of things. We’ve pumped so much money/stimulus into the system that the inflation spike will be severe and painful and that will stall out the economy across the board.
The other side of the story is this:
This is a spike in “transitional” inflation. This is a new one for me. I’ve been paying attention to financial markets for a long time and have not heard the phrase “transitional inflation.” But I actually think this is a good description of the other story. Which is this: we had a precipitous record drop in the economy when COVID-19 hit. We’ve all seen those graphs. Of course, there will be a snapback as we come out. More people are spending more money now. Supply and demand will make things more expensive. Also, the labor costs for various things because so many people were/are out of work will put upward pressure on prices.
Like a lot of early indicators, the key is not to overreact but to continue to pay attention. I expressed previously that I was concerned about inflation and it’s something I am paying attention to. But we need more data points.
Oddly, what I am encouraged by is the market’s reaction. We’ve been in this (in my opinion) irrational exuberance cycle on the stock market. Bad news: the market goes up because that means the Fed will continue to give us cash. Good news: see the economy is back so let’s go! At least we’re seeing the market react appropriately to the news.