Weekly Inflation Outlook: We Have Not Seen the Last of Inflation

• he Fed's target of a 2% inflation rate remains very far-fetched

,How to choose a suitable foreign exchange dealer I only gave you half of the story — and it turned out to be the wrong half.

would probably come in a little hot, the markets wouldn’t react well, and the Fed would talk soothingly about inflation while proceeding with their 50bps hiking plan.

raised overnight interest rates by 50bps as everyone universally anticipated. So far, so good. The formal statement was almost exactly unchanged. The ‘dot plot,’ as expected, shifted higher along the lines of what Fed speakers have been saying. But in Chairman Powell’s post-meeting presser, the accompanying message was quite hawkish.

almost immediately trimmed 1.5%-2% from quotes. Thursday saw another 100 S&P 500 points. Friday, another 44.

It was obvious they were going to do that, right? Evidently, some inexperienced investors may have expected that shift in tone. Or maybe it’s the algos. Either way, there was nothing at all surprising about the Fed leaning against the exuberance of the market. It’s the standard operating procedure of the FOMC. Powell even said as much in his statement that opened the presser:

and lower equity prices make eminent sense anyway. While we are heading into a recession with very high confidence, inflation is likely to remain sticky, and consequently, long rates shouldn’t be trying to price in the next 300bp easing cycle yet.

What do markets say? 10-year inflation breakevens ( minus ) are at 2.15%, indicating that an investor who chooses between nominal 10-year Treasuries and TIPS should choose the latter unless he/she thinks inflation will be below 2.15%, compounded, over the next decade.

And what does history say?

Since 1933, the median year/year increase in CPI has been 3.00%. The median 10-year compounded inflation outcome has been 2.99%. However, this changes if you condition the observation on the starting point. Over that 90-year period, if year/year inflation was over 5% then the median of the subsequent10-year compounded inflation outcome was 5.06%.

Only one-eighth of those periods ended up at 2.15% or below, looking back from a decade later. The chart below shows those periods where y/y inflation at the beginning of the decade was over 5%. The y-axis shows the subsequent compounded 10-year outcome. The red line is drawn at the current level of 10-year inflation breakevens.

Source: BLS, Enduring Investments calculations

The conclusion I draw is that if you step back and take a look with the benefit of the hindsight of history, expecting inflation to come in at 2.15% or below — or, even, to come in very close to 2.15%...is pretty heroic.

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Disclosure: My company and/or funds and accounts we manage have positions in inflation-indexed bonds and various commodity and financial futures products and ETFs, that may be mentioned from time to time in this column.

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