Inflation Debate Front and Center

US stock market indexes opened mixed this morning (Dow -127 pts; SPX flat; Nasdaq +.3%). Banks, transports and pharmaceuticals are down .5% or more, whereas biotechs, semiconductors and retailers are up that much. Gold and copper surged 2-3% today probably as a result of a weaker dollar after the inflation report (see below). Bond prices rose in early trading. The iShares 20+ Year Treasury Bond fund (TLT) climbed .6% and the iBoxx High Grade Corporate Bond ETF (LQD) climbed .3%.

After today’s inflation report the Federal Reserve is likely to begin tapering its quantitative easing program before the end of the year. The Consumer Price Index (CPI) accelerated a bit in September to 5.4% year-over-year growth. This widely accepted gauge of retail inflation is rising faster than at any time since 1982. So -called Core CPI, which strips out energy and food costs, held steady at 4.0% growth. The spike is a direct result of 1) pandemic-driven global supply chain disruptions, 2) higher costs of doing business in the Covid era (i.e. higher wages), and 3) the sudden release of worldwide pent-up demand for all sorts of goods and services unavailable last year due to Covid shutdowns. Bloomberg News calls the combination of these factors “unprecedented.”

Economists and investors are parsing the data looking for clues as to whether higher inflation is temporary or a new permanent feature of this business cycle. There are some signs that the worst is past. Lumber prices have cooled, airfare, apparel & used car prices fell back in September, and CPI’s monthly gains seem to have peaked last summer. But other signs point to persistently higher inflation. Housing costs, which make up about one third of CPI, continue to rise. In addition, the report confirmed that wage growth is keeping up with inflation. This is good for consumers, but does tend to make inflation more sticky. Bloomberg quotes economist Ian Shepherdson thus: “Between now and the medium-term, investors need to be braced for data which will appear, at least, to threaten the ‘transitory’ story.” Trading in the bond market seems to corroborate that view. After the report was released, short-term Treasuries fell in price, whereas long-term Treasuries appreciated. This move suggests inflation over the next couple of years will be higher, but the average over longer periods will be manageable.

Blackrock (BLK) reported better than expected third quarter results and the stock is up 3.7% today. Total revenue rose 15.6% from year-ago levels as assets under management grew about 20%. Larry Fink, CEO of one of the largest investment management firms in the world, says there is a lot of cash sitting in money market funds waiting to be invested once seasonal and other temporary issues pass. “I’m very bullish over the long run…but this rotation, this consternation in the marketplace—I think that may be longer than people estimate.”