All Inflation Is Transitory. The Fed Will Be Late Again

Last week, we said:

“The market is trading well into 3-standard deviations above the 50-dma, and is overbought by just about every measure. Such suggests a short-term ‘cooling-off’ period is likely. With the weekly ‘buy signals’ intact, the markets should hold above key support levels during the next consolidation phase.” 


“As shown above, that is what is currently occurring. While the market remains in a very tight range, the “money flow” sell signal (middle panel) is reversing quickly. Importantly, note that the money flows (histogram) are rapidly declining on rallies which is a concern.”

While the “sell signal” remains intact, not surprisingly, the breakout above the consolidation on Thursday failed, with the selloff on Friday putting the market back where it started the week. Furthermore, the MACD “sell signal” in the lower panel also suggests that prices may remain somewhat capped for the time being. 

As noted, the concern remains of the decline in actual money flows. While the market is holding up near all-time highs, the support of positive money flows continues to deteriorate. Weakening money flows with the market remaining at more overbought conditions also suggest upside is limited over the next few weeks. 

We discussed these concerns in more detail in the latest 3-Minutes video (click to subscribe.)

For now, the market trend remains bullish and doesn’t suggest a sharp decrease of risk exposures is required. However, after reducing equity exposure previously, we are starting to look for the next short-term opportunity to increase risk. However, we aren’t expecting much before we get into the summer months, where, as we will discuss, the risk begins to rise markedly. 

All Inflation Is Transitory

On Wednesday, Jerome Powell commented that while he sees inflation, he believes it to be transitory. As my colleague Mish Shedlock noted:

“Inflation jumped as predicted, and so was the Fed comment about transitory.”

As Mish discusses, inflation depends much on how you measure it and who it impacts. However, inflation is and remains an always “transient” factor in the economy. As shown, there is a high correlation between economic growth and inflation. As such, given the economy will quickly return to sub-2% growth over the next 24-months, inflation pressures will also subside. 

Significantly, given the economy is roughly comprised of 70% consumption, sharp spikes in inflation slows consumption (higher prices lead to less quantity), thereby slowing economic growth. Such is particularly when inflation impacts things the bottom 80% of the population, which live paycheck-to-paycheck primarily, consume the most. The table below shows the current annual percentage change in the various categories. 

As shown above, food and beverage prices make up 15.08% of the CPI calculation. The chart below from Brett Freeze breaks down how consumers spend their money based on income classes. The lowest income earners, making $15,000 to $29,999, pay almost 25% of their earnings on food. That compares to only 7.5% for families making more than $150,000.

Housing comprises 56.3% of spending for the lowest income class and only 20% for the highest. The CPI inflation calculation does not accurately portray how inflation affects a large percentage of the population. (This is also the group whose entire boost in income from the stimulus will get absorbed by higher prices)

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