Blain’s Morning Porridge: Inflation, Rates, Recession or Stagflation – Nothing Is Clear Yet
Markets are in a wait-and-see mode right now. Last week’s CPI data looks good, at least from the headline number showing a decline. However, we could still face sticky inflation, with rates remaining higher than desired for some time.
Combined with poor economic growth, and it could lead to stagflation. The last episode of that condition lasted for nearly a decade. Even worse, the last time that happened, asset prices sank massively in real terms.
That’s why markets remain focused on inflation, and rightly so. While a drop to 5 percent looks better than the 9.6 percent at its peak nearly a year ago, it’s still too high. With central banks like the Federal Reserve targeting 2 percent inflation, it still needs to drop more.
Adding these factors up, we see why the market will likely remain in a wait-and-see mode for a few more months. Interest rates may not be high enough to finish off inflation. But the rapid rise in interest rates has created stress in the financial system.
Ultimately, it will take higher interest rates past todays. Bond yields are still negative in real terms. Energy costs have jumped higher. And food, clothing, and housing prices have risen high enough to keep inflation sticky for some time.
Investors may want to shift away from growth stocks, and towards companies that can keep up with inflation if this kind of market continues.