Inflation: Some Say It Is A Supply Shock But… Is It?

“Bond yields have had an enormous impact on how you think about growth versus value. Central banks globally have been keeping suppressed rates really since 2008. That suggests they don’t have confidence in long-term, sustainable, durable growth. The U.S. is a heavy growth market. If you believe bond yields are going to edge higher, then growth stocks are going to take it a little bit on the chin.”

As another factor depressing U.S. Treasury yields, the spread of the Delta variant elicits fears of an economic slowdown. And with the FED’s prospective taper increasing the anxiety, the narrative has shifted to slower growth, lower inflation, and, eventually, a reenactment of the FED cutting interest rates. However, while cases surge and the panic intensifies, U.K. hospitalizations as a percentage of cases (the U.K. has been hard-hit by the Delta variant) have actually declined.

Please see below:

On top of that, IHS Markit also released its U.S. services PMI on Aug. 4. And while the headline index declined from 64.6 in June to 59.9 in July, the report revealed:

“New business continued to rise in July, and at one of the fastest rates since data collection began in October 2009. The upturn was supported by a pick-up in client demand following vaccinations and the relaxation of COVID-19 restrictions. The robust expansion was one of the quickest in over three years despite softening to the slowest since February.”

And while services have been a major laggard – due to coronavirus-related restrictions on social/in-person activity – inflation is still moving higher.

Please see below:

Source: IHS Markit

Circling Back to Inflation

Furthermore, while I’ve warned about rampant inflation for months, Citigroup’s Inflation Surprise Index hit another all-time high in July. For context, a positive ‘surprise’ occurs when actual inflation exceeds economists’ consensus estimate.

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Disclaimer: All essays, research and information found on the Website represent the analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong ...

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William K. 3 months ago Member's comment

There are plenty of groceries, so no shortage there, and lots of gas at the pumps, but all prices are up 5% at least. So that certainly has the smell of inflation. The permanent variety, not transient or transitory, but here to stay.