Inflating Inflation Expectations

Some observers continue to see inflation in rising stock and bond prices, but it is not typically what economists mean by inflation, which is an increase in the general price level. While that asset price appreciation is indeed worth investigating, it should not be exaggerated. Surely given that only around half of American households own stock directly or indirectly and that the top 10% account for nearly 85% of equity investment, a rising stock market has a different impact than a rise in medical services, for example.  

The recent explosion of Bitcoin (+29% in October, 40% in November, and roughly 50% here in December) is notable. Some cite it as an inflationary warning, but this link has not been established. Although practically nothing can compete with that kind of volatility, it appears to be tracking risk assets(~0.88 correlation with the NASDAQ over the past 90 days) on a purely directional basis. There may be a wealth effect from its rapid appreciation but whether this is used to fund consumption or stays in the cyber currency world has yet to be seen. 

The shifting of paradigms is always provocative, and similar arguments were made after the Great Financial Crisis. As businesses and investors, we need to stay alert to this possibility. However, pricing decisions and debt management issues cannot be predicated on this still hypothetical paradigm shift that lifts general price levels. We need to ground our decisions on something more concrete. Nearly half the CPI and PCE deflator are accounted for by shelter and medicine (and medical services). From the base effect, we know that US inflation measures may rise in the spring and ease in the summer before rising again in Q4 21. There may be some monetary and fiscal conditions that are pre-conditions of past inflation, but in recent cycles, the patient was asymptomatic, though still needs to be monitored. 

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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