Recent Inflation Data and a Global Perspective

Michael Rudd, CFA | President, CEO & Portfolio Manager

We have spent some time over this year in this note discussing inflation and how it relates to the valuation of financial assets. Also, we have discussed how the major central banks around the world are laser focused on controlling inflation. Indeed, over time, out of control inflation has caused several countries, economies, and regimes to collapse. It is something that essentially any rational policy maker would strive to avoid. The US Federal Open Market Committee (FOMC) has responded to recent inflation increases aggressively by raising rates from 0% to 4% in a matter of months.  They have also engaged in quantitative tightening, by reducing the size of its portfolio of purchased fixed income assets by allowing it to “runoff” each month with natural maturity. One week ago, it seems their actions have paid off with an initial crack in headline US inflation data. Markets reacted very positively. One data point does not create a new trend, so we cannot draw any long-term conclusions from the change, but we thought that we would add our views on this important development.

  • Figure One presents the “peak” last week (blue line) that caused all of the excitement. As I noted earlier, we cannot determine if this is “The Peak” or just a blip before more acceleration, but investment consensus at this point is that the FOMC will now slow the rate increases (recall they have been raising 75bps at each meeting) and then hold the level between 4.5-5% for a year. The debate now is whether or not the FOMC has gone too far too fast and will potentially push the US into recession next year.
  • Another consideration is the rest of the world. Other large economies are thankfully not in the same Japan’s GDP has still not recovered to its pre-pandemic levels, inflation is low (0.6%), wage growth is low, and its administered rates are still close to zero. China is in a similar situation with a lack luster economy generating limited inflation and significant capacity to ease monetary policy. The balance of Asia is also in a similar situation with peaking inflation being led by cost input rather than demand pull. Europe and the UK are the only areas where we see real concern with respect to increasing inflation, increasing administered rates and poor economic outlook, all occurring at the same time.

“This means that” we have a hard time believing that we are headed to recession in the US, especially with employment rates so low (unless there is a massive increase in the participation rate) and inflation potentially dropping from here.  Inflation in the other major areas is not as high. With the bulk of the global economy already dealing with lower inflation and decreasing economic activity we see this as more of a western issue that can be managed over the medium term.


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