Thoughts on Inflation

Michael Rudd, CFA | President, CEO & Portfolio Manager

Two weeks ago, we identified three areas of focus that we will be discussing this spring. The interplay between these three major economic forces will impact all investors. They are somewhat related, and dependent on each other, so our discussion will sometimes seem circular, as the topics lead into one another. Three topics are:


  1. The trajectory of the economy and the potential for slow-down / recession.
  2. The Job market, its impact on corporate profitability (negative) and consumer spending (positive).
  3. Inflation and how the US Fed and financial markets interpret and react to data.

With respect to Item 3, during our daily investment call, we review economic data from the major world economies. During our review recently, we have seen inflation moderate. It is somewhat geography dependent but does look like prices have decreased for a number of sectors of the global economy. Figure 1 presents inflation rates from around the world. As you can see, inflation remains elevated in most countries after peaking during the pandemic. It does also appear that the structural deflation/low inflation that pained Europe and Japan for decades has been broken. While inflation has come down globally for the most part, it remains too high for most central bankers around the world.

Figure 2 presents goods and services inflation. The supply chain disruptions that drove scarcity of goods have essentially been fixed, and many industries are now dealing with over-stocked inventories. Near-shoring will remain a structural theme but as you can see, services and consumer are high and sticky.

This means that, as we noted last week, it is hard to see the US going into recession with a strong employment market but given that the FOMC has stated it will hold its tight monetary policy until its preferred measure of inflation drops essentially in half… something will eventually have to give. A recession will probably come from breaking structural inflation with higher rates, and that means essentially creating unemployment.

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