Inflation Insight Q1 2022

Inflation is a political lightning rod. As a result, there is a good deal of misconception around it. The Consumer Price Index (CPI) is up 7.9% from a year ago and will likely peak in the 8.5 – 9.0% range sometime in the next couple of months, and will be the highest since 1981. Personal note – I started in the financial planning business is 1982 and inflation was above 11%. Politicians blame war, or COVID, and the bottom line is just too much money creation.

Others think inflation will be temporary and point to “core” inflation. Core prices, which exclude the volatile food and energy sectors, are up 6.4% versus a year ago and will likely peak somewhere slightly higher than this rate.

There is a reason to exclude some prices when there are very special factors at play…but food and energy prices have been going up for over a year. And just because more of the inflationary impact of the surging M2 measure of money (up more than 40% since the start of COVID) shows up in food and energy prices, or even used car prices, isn’t a reason not to count them.

The government figures on inflation are not perfect and every government measure of inflation is up. It’s pretty clear the Fed is going to have trouble wrestling inflation back down for many reasons. The cure is never painless. You must admit you have a problem before you can fix a problem and that is not likely to happen until after November 2022.

Current pain points with significant ramifications are the mortgage rate rising to almost 5% from under 3% just 6 months ago. Buying has declined precipitously and so have refi’s for the obvious reason. Carrying credit card debt is also up.

A final note…the money is flowing in big chunks out of bonds and into stocks.