May 12, 2021
While this was a surprise to those that have been taking their guidance from the Fed on the inflation trajectory, it should be no surprise to anyone that has been paying attention to policymaking and to soaring asset prices.
Again, as we've discussed, what comes next is higher prices in day-to-day living. And then wages will have to follow.
Today, we had some undeniable evidence that prices in day-to-day living are on the move. The year-over-year change, at 4.2%, was the highest since 2008. But by far, the most important number was the month-over-month change. From March to April, the consumer price index rose by 0.8%.
If we annualize this month-over-month number, we are looking at a trajectory of double-digit annual inflation.
Sure, the Fed will keep telling us that it's supply chain and pent-up demand related, which will normalize in time. But what the Fed and the politicians don't want to talk about, is the impact on prices from the trillions of dollars they have dumped onto the economy.
Common sense tells us that it will play out as we are seeing it. Hot, maybe rampant inflation. This may not look great for stocks today, but broadly nominal prices of stocks will continue higher on this inflation scenario. It’s the return, after inflation, that will be smaller.