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Is The Inflation Battle Won?
It's possible that Wednesday's CPI release in the US marked a turning point in the battle to coax the inflation genie back in the lantern.
As documented here in real time and across a pair of subsequent articles, the figures constituted what I'd be inclined to call the first definitive evidence in favor of the notion that the disinflation process has well and truly begun.
Context is important. The below-consensus read on price growth for June should be considered with a third straight drop on
In a pragmatic-investor sense, I think the inflation battle is “won” in the short term and maybe the medium term.
For most investors, the battle is “won” when inflation slows enough to allow the Fed to stop raising rates and the market to stop raising yields based on inflation. If the Fed delivers one more 25bp hike, or two more, seems not that important. After 500 bp, is another 25-50 bp at the short end going to change things very much? The 10Y UST is already close to 4% and mortgages at 7%. Whether headline CPI hovers around 2.5-3.0%, or declines to 2%, over the next few quarters, also seems not that important – for investors.
By “short term”, I mean next couple of quarters.
Longer term, trend inflation may be higher than 2%, based on deglobalization, deficit spending, labor force constraints, etc. I don’t have conviction on that, and am not sure it matters from a near term investment perspective.
As I see all this data and reactions of various parties, I can’t help remember Pres. Bush and pointing to his silly sign that proclaimed “Mission Accomplished.” Only thing is, it wasn’t true. Wanting and having are two different things. The big inflation I remember in the sixties and seventies, took Nixon and Volcker more than a decade to vanquish. Stocks are high enough for now and five percent never killed anybody.