Inflation.What Now? |

Inflation.What Now?

David Vomund

Stocks have been falling with big-cap tech names, last year’s best performers, leading the way down. Profit-taking was a factor after a good run, but so was the growing concern that rising inflation will force the Fed to raise interest rates sooner than earlier thought and to a much higher level. An understandable concern.

David Vomund

The selling began shortly after the minutes were released from the Fed’s December meeting. Until that point Jerome Powell hadn’t let on that behind closed doors he and his colleagues were more spooked by inflation than they said and likely to be more aggressive. At least they’re flexible. That’s something. But they’ve been wrong on their policy for a few years and blind to the gathering storm called inflation. That’s something, too.

If history is any guide Powell’s rate-boosting outlook will likely not be accurate. JPMorgan’s Jamie Dimon expects “more than four increases this year.” The Fed has to make up for missing the inflation threat earlier.

Inflation has finally caught the Fed’s eye. Had they chatted with some grocery shoppers or those filling up at their local Chevron they would have caught on earlier. Price increases at the store and pump have an impact we all understand and can partially mitigate by consuming less and substituting other items. But energy and electric power are costs embedded in virtually everything we consume to one extent or another. For that reason inflation’s impact hits those with lower incomes the hardest. They see rising prices and must either tap savings, if they have any, or work longer hours to bridge the gap. Many can do neither.

Investors are figuring this out. When interest rates are rising, as they are now, growth stocks that produce little or no income increasingly discourage investors who see value elsewhere, including in energy and healthcare companies, most of which pay and often raise dividends.

As for inflation itself Goldman Sachs sees higher prices for commodities in a “super cycle” that could last ten years. Crude oil will lead the way. If Iran re-joins the international oil market this year crude oil would rise to $85. If they don’t (likely) oil could see $95 this year and more than $100 in 2023. If true, those numbers would be a sugar high for producers, but temporarily so if high prices cause what economists call “demand destruction.” To some degree they will. People will drive less.

The commodity super cycle Goldman foresees would not be good news for the economy, for inflation and for the stock and bond markets. It would lead to ever higher interest rates. I am not yet onboard with Goldman on this. But we should be aware of its possibility.

David Vomund is an Incline Village-based Independent Investment Advisor. Information is found at or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.



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