How Much Medicine is Enough to Shift Away from the Inflation Narrative?

Daniel Hawley |

"Inflation" numbers predictably continue to shape the market narrative. As you may have read in our previous blog posts we continue to see this being the case until the economic data starts to show a consistent declining trend. While markets will look for early signs that the tide is turning, only consistent data will mark a tangible shift in the markets and a change in Fed sentiment.

Until that time, the Federal Reserve will continue to hike rates aggressively. They have made it abundantly clear that this is their number one priority and while they would like to avoid a recession that is not going to sway their intent to bring inflation into their acceptable orbit of less than 2% per year. Given the significant monetary forces that were put in motion since the inception of COVID it may take more time and hikes than anyone would like or anticipates.

A good analogy is being at the dentist for an unpleasant procedure that takes more time to resolve. We want it to end but it won't until the dentist is satisfied they have done the job. The Fed dentist wont be done until they meet their objective.

Where is inflation signaling itself loudest? The increase in prices of rent, food and gas is noticeable to almost every household in America. While gas prices are coming down, rent and food prices are not. Food prices are up 16% from one year ago. Rents for modest apartments in New York or San Francisco can exceed $5,000/month. Rent is a lagging indicator and may well slow the fight against inflation.

"They're watching for where inflation is coming from" said Quincy Krosby, chief equity strategist at LPL Financial. "It's very clear to them it's food, it's transportation and rent. Rents keeps marching higher. That is the most stubborn of everything the Fed is fighting at this point".

Rents this high for modest apartments are a firm indicator of where inflation has taken us.

It is important to acknowledge that markets which are forward looking by at least 6 months, will still inevitably turn before inflation data is more tame. Signs will present themselves which in-turn will be followed by analyst predictions and renewed hope that the inflation turning point is here and at some point they will be right! Until then, they may be wrong a couple more times.

Trying to predict the market short term movements is a futile task. Investing and wealth management requires a longer term perspective as well as many other things. As with many things in life, things often take longer to get done than anticipated.