Wednesday morning’s inflation numbers (as indicated by the CPI) were expected to be the highest in nearly a decade, although many in the press suggested that the numbers might appear bigger because they are being compared to the weak prices in 2020 — as a result of the pandemic. Remember also that the Fed has continued to stress that a pickup in inflation would be transitory. At this moment I’m not so sure.

At the risk of being elementary, let’s review what the CPI actually is and why we should care what its reports may mean. CPI is an initialism for Consumer Price Index. The index is put together and tracked by a department of the U.S. Federal Government known as the Bureau of Labor Statistics. The sole purpose of the CPI Index is to detect and track changes in consumer prices, in other words, the ‘cost of living’. When that cost goes up, we call that inflation.

So, to measure the changes in ‘cost of living’ the BLS measures the costs of various consumer goods and services — which they toss into a ‘basket’ and tally up the costs. The things they toss into the basket are examples of goods and services that we all tend to use on a regular basis. These include things like transportation, food, rent, medical care, grooming and so on (actually over 80,000 items are in the report). Each month data is collected from the Bureau of Labor Statistics as they visit stores, offices and websites for nationwide information on prices. Then specialists at the BLS examine the data for accuracy and adjust items based on any item’s value. I find it interesting that the actual calculation is changed almost every year.

Let’s get back to looking at the latest report, which caused a chain-reaction response in financial markets. Fireworks were expected if the numbers came out hot, and fireworks we got. A gain in the range of 3.6% was anticipated. When the actual CPI number was announced, however, at +4.2% (the biggest leap in CPI since 2008!), markets responded negatively with about a 2% selloff. (It did not help one bit that to even mention 2008 – the beginning of what became known as the Global Economic Crisis. Fortunately there is NO similarity between then and now.)

Early this morning ‘The Media’ appeared to stoke our sorry memories of the inflationary experience from the 60’s and 70’s when big government spending, an oil crisis, and a SLOW-moving Fed combined to send price gains up into the double-digits. Central banks finally put a lid on that by raising rates to unthinkable levels- resulting in a break in the housing and jobs markets of that time.

However, if the latest round of price increases is mostly a result of imbalances in the economic system caused by the raging covid events of last year, (and this appears likely to me!) then it’s just the logistics that consumers have gone a year without buying the things they normally do, without traveling, and without getting out of the house to just ‘shop’ that COULD be causing this bump. It’s raw materials, electronics, even used cars that are suddenly in demand- and consumers have been saving the cash that is now chasing these materials and bidding up the prices. That of course, COULD be transitory.

We won’t know for a while, and the inflation assumption affects our buying and also our investing habits. An inflationary environment bodes well for certain assets, and NOT for others. That has a direct effect on you and me. And that may be what the public is thinking about this week.

Personally, I think that when people are confused or have no idea what’s going on, it’s easier to reach for the ‘sell’ button. If Thursday’s market is an about-face with stocks running back up, that will be what I expect as I write this on Wednesday. People got a whiff of bad news on Wednesday morning and reacted. Perhaps Thursday will be a bit of rationality returning to markets. We’ll see.

Ron’s Market Minute — Whack a Mole!

You might remember seeing a game at a kiddie amusement park called ‘whack-a-mole’. In that game little moles pop up from random holes in a board, and your objective is to whack them back down with a mallet. Then as soon as one gets whacked down, another one pops up. The result is that your attempt to solve the problem results only in a temporary or minor improvement.

This week I heard the fight against cyber-crime referred to as a game of whack-a-mole. And I can see that. It appears that one cyber-attack is stopped and another one pops up. (Like the pipeline problem on the east coast.) Another instance that I heard this week referred to today’s market environment. One asset class pops up and investors jump onboard, only to see it whacked down by the economy, and another one takes its place. In a normal sort of environment there is some serial correlation- where an object (investment class) tends to move in the same general direction over some time period.

In this rather unusual year, we’re seeing many moles pop up and then almost immediately disappear, only to be replaced by others. Eventually supply and demand intervenes and restores a sense of reason. At that point the longer term type of thinking chases away the reactionaries obsessed with the momentary. At such times it is good to recall a warning from former president (and former Supreme Allied Commander) Eisenhower, who noted ‘Don’t confuse the urgent with the important’. Distractions must be kept in check. Markets will return to a basic supply-and-demand environment in which it’s easier to spot the moles that will be in place for longer periods of time. Here’s hoping it comes sooner rather than later. Mother always said there would be times like these.

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
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