Will Inflation Continue to Rise?

Stocks traded flat this morning after the market enjoyed one of its best months on record. The October rally took the S&P over 7% higher as of Friday’s close. It was the largest monthly gain for the index since November of last year.

And now, toward the end of a mostly better-than-expected earnings season, bulls are looking for new reasons to keep buying.

Wall Street’s biggest bull, without a shadow of a doubt, has been Fundstrat’s Tom Lee, the same man responsible for correctly predicting Bitcoin’s 2017 peak of almost $20,000.

Lee’s been wrong about other predictions since then. But he was right when he called new highs for the market in anticipation of a strong earnings season several weeks ago.

Lee sees even stronger revenues coming down the pipe next year thanks to recent shifts in health trends.

“In our view, the key story arc driving equities is the strengthening global recovery,” Lee wrote in a note to clients.

“COVID-19 trends are improving, but with vaccinations and boosters, the improvement in healthcare risk could materially accelerate in 2022.”

Inflation, however, could limit the economic outlook significantly if it continues to rise. The Commerce Department reported Friday that the Fed’s favorite inflation measure – the personal consumption expenditures price index – hit a 30-year high in September.

The Federal Reserve will hold a meeting this week that starts Tuesday and ends Wednesday. What Fed Chairman Jerome Powell has to say about inflation in his post-meeting remarks could sway sentiment greatly for the remainder of the year.

“The Fed is part of a global move to remove accommodation, and the market drives right past that,” said Bleakley Advisory Group CIO Peter Boockvar, referencing the Fed’s coming taper of asset purchases.

“In a way, the stock market is playing a game of chicken, with this inflation move and interest rates and the response from central banks.”

Up until now, Powell’s insisted that inflation has been merely “transitory,” or temporary. Treasury Secretary Janet Yellen has said the same thing when given the chance.

But Yellen also mentioned last week that inflation was “more persistent” than expected. Worse yet, she doesn’t think inflation will come down until the second half of 2022.

That doesn’t seem all that transitory, does it? And what if her prediction is wrong? Powell and Yellen both underestimated the rate of inflation once already.

It could easily happen again.

When an overabundance of cash “chases” too few goods, inflation always arises. The Fed will try to reduce the amount of cash in the economy by tapering.

The supply of goods, on the other hand, really needs to start surging soon for inflation to drop. Lingering supply chain problems won’t let that happen, though, and a coming vaccine mandate could make the issue even worse.

Rumors of walk-outs at major airlines could be indicative of another supply chain-related obstacle. Southwest had to cancel many of its flights last month. The company’s CEO claimed a staff “sick-out” wasn’t the cause. American Airlines canceled roughly 2,000 flights over the last weekend, too. Much like Southwest, American’s CEO blamed the cancelations on weather and a “staffing shortage,” not unruly pilots.

In reality, though, something more organized among plane crews may be taking place. Other, less-critical industries have experienced similar walk-outs related to vaccine requirements. First-responders in major cities have threatened to unofficially strike as well.

Simply put, the backdrop for a surge in supply over the next few months does not exist. And let’s not forget that the Fed won’t be shutting off its asset purchases entirely when it finally decides to taper. Powell’s likely to only throttle those asset purchases slightly at first.

That means high inflation won’t go away any time soon. Maybe not even until 2023 (or later) if experts within the shipping industry are accurate in predicting multi-year logjams at the world’s major ports, no matter how much Powell or Yellen insist that spiking prices are just a temporary hurdle prior to the next great economic boom.


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