No. of Recommendations: 13
And if we saw another couple of years of ~10% inflation, even if equity prices remained flat/stagnant from over that time period without significant further deterioration, the real losses in terms of purchasing power would be approaching 50%.
This train of thought leads me to think that if anyone intends to use past drawdowns as a guidepost for when to re-enter, it'll be important to account for the effect of inflation in doing so.
I welcome any thoughts on the above. 7% is not 'around 10%'. Inflation has been high, but let's not get too far out over our skis.
And from some indications, much of it is already in the past.
What if Inflation Suddenly Dropped and No One Noticed?
The high year-over-year rate masks progress in the past five months. But we're not out of the woods. Over the past five months (June to November 2022), inflation has slowed to a crawl. Whether measured by the consumer-price index, or CPI, which most people watch, or the price index for personal consumption expenditures, or PCE, which the Federal Reserve prefers, the annualized inflation rate has been around 2.5% over these five months.
Yes, you read that right. Yet hardly anyone has noticed this stunning development because of the near-universal concen-tration on price changes measured over 12-month periods, which are still 7.1% for CPI inflation and 5.5% for PCE Inflation https://www.wsj.com/articles/inflation-sudden-drop...This is from Alan Binder, head of the Fed in the 90's. 'Team Transitory' has taken much ribbing over the prediction that inflation would flare up but then quickly go away. I was one of them. It appears that the optimism was a bit much, but that perhaps the general thesis was correct.
I'm willing to posit that inflation will last a bit longer, given the rebound effect of rents and wages that is sure to follow such a quick but short term spike, but overall the underlying causes have, for the moment at least, abated. The overheated housing market has cooled. Lumber prices have come down 75% and are now below 2018 levels. Gas prices (adjusted for that inflation) are also stasis.
Personally, I'm more worried about a Fed over-reactive tightening than under. (I do think they should continue to hike, just as smaller increments, 50bps followed by 25, depending on trends.) We'll see, but I'm not terribly worried at this point. My far bigger concern is the debt ceiling and the performance caucus, which could throw the bond market and stocks into chaos. And probably will.
