Are Markets Done With Inflation Worries?

In case you took a day off yesterday, there’s a new narrative circulating that inflation anxiety is history and worries about slowing economic growth have moved to the fore. Maybe, but there’s no law that says you can’t have both macro risks bubbling, or neither.

Granted, if growth slows fast enough and far enough, it’ll take the wind out of the recent inflationary surge. Meantime, if economic activity stays relatively strong, even if it decelerates, inflation could continue to surprise on the upside. Given the ongoing pandemic shock in the macro numbers, it’s fair to say that getting a handle on the big-picture trend remains an evolving challenge.

What is clear is that inflation risk hasn’t suddenly faded in the last few days, nor have growth worries emerged from nothing over the past week. Both risk factors have been with us for months and will remain so for the near term. Mr. Market, on the other hand, appears to divert his attention from one thing to the next, sometimes with dramatic effect in the short run. Trying to make sense of this over days or weeks is like trying to ride a wild horse overdosing on Ritalin: Even if you hold tight, it’s going to be one hell of a ride.

As an antidote to letting the headlines play havoc with expectations, let’s run a quick reality check on inflation. In upcoming posts we’ll look at US growth prospects, but for now I’ll summarize my economic analysis via the July 18 edition of The US Business Cycle Risk Report:

The US economy continues to reflect strong growth, but the evidence is mounting that peak activity is behind us. But that doesn’t change the fact that recession risk remains virtually nil and for the foreseeable future the probability of economic contraction will remain low (short of an unforeseen exogenous shock)… The main macro focus: How fast will it slow and how far out does the slowdown extend before triggering a significant increase in recession risk?

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Disclosures: None.

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