• Robert Baharian

Inflation Boogeyman

Inflation. The word on every investors' mind right now. Financial markets are treading carefully, and those who are convinced that inflation is coming are cashing in their chips.


The narrative goes something like this... Our economy is re-opening and we are experiencing a boom in demand, resulting in shortages of inputs, in turn fanning inflation. I don't disagree with any of this. In fact, it's pretty spot on. The issue lies in the hype around inflation. Here is the long-term United States CPI (Consumer Price Index). It's basically on trend. Pretty impressive considering the global pandemic, but hardly a huge breakout as it's being purported by the headlines.

Surprisingly, US retail and food sales has well and truly broken out from it's trend. I've plotted the chart below. I can certainly relate to the three scoop ice cream theory, which basically hypothesises that having been in lock down for so long, consumers will spend that little more to make up for lost time and spending.

I think it's too early to tell whether or not we're going to have inflation blowing out. There's so much that needs to play out. I think too many of us jump to extreme conclusions too early on in the piece. Currently the US Federal Reserve's favourite inflation measure remains well below the 2% target, which means interest rates are unlikely to move anytime soon.

The only thing that is certain right now is how uncertain everything is. No one knows how this is going to play out. We are seeing some early signs right now, and although I am optimistic about the future, I think this is going to be a slow and long ride. Buckle in and get comfy.