Inflation Or Stagflation?
THE HIGHEST INFLATION IN 40 YEARS
The CPI release on Thursday February 10th marked the highest rate of inflation since 1982, jumping from 7.0% YOY in December to 7.5% YOY in January. Many feel that the Federal Reserve Bank has lost control and will need to raise rates further and faster than previously expected, possibly pushing the economy into recession.
Chart Source: Bloomberg
The concerns are on two levels. First, a wage spiral could develop where wages continually rise at an unrealistic pace further pushing retail costs up. Second, increasing costs slows demand and impacts overall GDP on a national level. The following table outlines some of the every day expenses that have risen way beyond the broad inflation rate of 7.5%.
Table Source: Bloomberg
GDP SLOWING DRAMATICALLY
Investors typically point to the Atlanta Federal Reserve Bank GDPNow estimate, in order to gauge where the economy is headed. Is it growing or slowing? The data is currently indicating (data as of 02/11/0222) a dramatic slowdown.
Chart Source: https://www.atlantafed.org/cqer/research/gdpnow
STAGFLATION
Stagflation is when inflation is higher than growth. In my opinion I believe that the odds are high that we are entering an stagflationary time period. No one knows how long this could last, it could last 3 months or 12 months. What we should be pretty sure of is that a stagflationary environment can be a serious headwind for stock market returns and if accompanied by a recession detrimental to stock market returns.
Note: past performance is not an indication of future results and expectations might not materialize. Current investor concerns could evaporate as fast as they occurred.
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DEFINITIONS
Atlanta Fed GDPNow – The Atlanta Fed GDPNow estimate is a model-based projection. It is not an official forecast, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow, the estimate is based solely on the mathematical results of the model. The model does not capture the impact of COVID-19 and social mobility beyond their impact on GDP source data and relevant economic reports that have already been released. The model does not anticipate future economic reports.
Bloomberg - Bloomberg provides financial software tools and enterprise applications such as analytics and equity trading platform, data services, and news to financial companies and organizations through the Bloomberg Terminal (via its Bloomberg Professional Service), its core revenue-generating product. Bloomberg L.P. also includes a wire service (Bloomberg News), a global television network (Bloomberg Television), websites, radio stations (Bloomberg Radio), subscription-only newsletters, and two magazines: Bloomberg Businessweek and Bloomberg Markets.
Blue Chip Economic Indicators – Utilized by the Atlanta Fed GDPNow. Each month since 1976, Blue Chip Economic Indicators has polled America's top business economists, collecting their forecasts of U.S. economic growth, inflation, interest rates, and a host of other critical indicators of future business activity. Our 30+ year track record of providing corporate and government decision-makers with our survey results has made Blue Chip Economic Indicators synonymous with the latest in expert opinion on the future performance of the American economy. The editor of the Blue Chip Economic Indicators is Joseph Aguinaldo.
Blue Chip Financial Forecasts – Utilized by the Atlanta Fed GDPNow. The forecast provides the latest in prevailing opinion about the future direction and level of U.S. interest rates. Survey participants such as Bank of America, Goldman Sachs & Co., Swiss Re, Loomis, Sayles & Company, and J.P. MorganChase, provide forecasts for each of the next six quarters for the following variables: Federal Funds Rate, Prime Rate, LIBOR, 3-month, Commercial Paper, 1-month, Treasury Bills, 3-month, 6-month, 1-year, Treasury Notes, 2-year, 5-year, 10-year, Average Long-term Treasury Yield, Corporate Aaa Bond, Corporate Baa Bond, State & Local Bond, Home Mortgage Rate, Fed's Major Currency Index, Real GDP, GDP Chained Price Index, Consumer Price Index.
Blue Chip Survey – Utilized by the Atlanta Fed GDPNow. The Blue Chip Survey is comprised of the top 10 average forecasts and the bottom 10 average forecasts.
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