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Inflation Probably Not Going Away Anytime Soon

By Michael KramerMarket OverviewNov 18, 2022 09:12
uk.investing.com/analysis/inflation-probably-not-going-away-anytime-soon-200547617
Inflation Probably Not Going Away Anytime Soon
By Michael Kramer   |  Nov 18, 2022 09:12
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Markets went into a euphoric mood after the CPI report came in lighter than expected last week. While the numbers showed that the pace of inflation might be slowing, it remains just one measure of inflation, with other estimates showing something completely different. So despite the excitement about the disinflationary forces witnessed in the CPI, any conclusion may prove to be premature.

Market-based inflation expectations have plunged since the beginning of November and fell further after the CPI report. But consumer-based inflation expectations have been on the rise, based on surveys from the University of Michigan and the NY Fed.

Market-Based Inflation Expectations May Be Heading the Wrong Way

Since the beginning of November, 5-year breakeven inflation rates have plunged from around 2.7% to about 2.35%. That is a significant drop in a short period. It also makes one wonder if the market has gotten ahead of itself on how quickly it sees inflation falling.

5-Year Breakeven Inflation Rate
5-Year Breakeven Inflation Rate

As market-based inflation expectations fall, consumer-based inflation expectations are rising. That last part may be the most important.

The shift in consumer-based inflation expectations follows a consistent trend of falling over the past few months. The latest data from the NY Fed shows that three years ahead, expected inflation rates have risen to 3.11% from a low of 2.76% in August. Meanwhile, the University of Michigan survey sees inflation rising at 3% on a 5 to 10-year time horizon from a low of 2.7% in September.

UMich 5-10 Year Vs. NY Fed 3-Year Inflation Expectations
UMich 5-10 Year Vs. NY Fed 3-Year Inflation Expectations

Consumer-Based Inflation May Be Leading the Way

These consumer-based inflation expectations could tell us that market-based inflation expectations are due to rise again. From comparing the data and looking at the University of Michigan and the NY Fed against market-based three and 5-year breakeven inflation expectations, it seems pretty clear that consumer inflation expectations bottomed before market-based expectations in late 2019 and early 2020 and peaked before market-based expectations in late 2021 and early 2022. The turn higher in the Michigan and NY Fed surveys could tell us where market-based expectations are heading.

UMich, NY Fed, Market 3 and 5-year Breakeven Inflation Expectations
UMich, NY Fed, Market 3 and 5-year Breakeven Inflation Expectations

Corporate Impacts

The reason is that consumers are feeling the effects of rising prices firsthand. Target (NYSE:TGT) recently reported very weak quarterly results, causing the stock to plunge. The company noted that sales and profits weakened towards the end of the quarter as rising prices and interest rates impacted shoppers. Meanwhile, Walmart (NYSE:WMT) raised its outlook for the year as it attracted more high-income shoppers looking to offset the cost of rising prices elsewhere.

Based on some of this anecdotal evidence, the eutrophic nature of the market following that cooler-than-expected CPI was not only too early but maybe entirely wrong. The market may soon find that its view on the pace of inflation slowing needs to be revised and that it may find over time that inflation tends to travel in waves, which means periods where it rises, followed by periods where it falls.

***

Disclosure: Charts used with the permission of Bloomberg Finance LP. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer's views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer's analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer's statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Past performance of an index is not an indication or guarantee of future results. It is not possible to invest directly in an index. Exposure to an asset class represented by an index may be available through investable instruments based on that index. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should know the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment. Michael Kramer and Mott Capital received compensation for this article.

Inflation Probably Not Going Away Anytime Soon
 

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Inflation Probably Not Going Away Anytime Soon

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