The biggest economic release for financial markets has traditionally been Jobs day, but in recent months, CPI  (Consumer Price Index) day has taken the spotlight. Headline inflation on Friday was growth of 6.8% Y/Y in November, which was the highest level since the summer of 1982. The worsening price environment will likely prompt the Fed to accelerate stimulus withdrawal or deliver a swift policy tightening at next Fed meeting on Dec 14-15. It will also signal a big pivot for the central bank, which until now had been more worried about the “maximum employment”.

The problem, of course, is that the Fed misread the inflation data and now is playing catch up. Which means, the inflation storm will batter American families for at least another six months, and there’s no quick end in sight.

How will this end is the big question.

Future Wealth’s View

The bulk of the impact of inflation has been restricted to energy, automobiles, housing and food. Healthcare, insurance and other service sectors have largely been spared from the pricing increase. Increase in energy and automobile prices have been impacted by shortages. Both should be alleviated in the next 6-12 months. Increases in housing prices, on the other hand, tend to be sticky i.e. they are unlikely to drop back to pre-covid levels. But, consumers buy food all the time and notice when food prices go up. In a higher interest rate environment, food prices will drop back to normal levels.

Of course, all of this depends on life getting back to normal. If there is one thing that the Fed fundamentally misjudged, it is that they expected the worldwide move to vaccinations will solve all problems and bring life back to the pre-Covid era. We, at Future Wealth, are not so sure that the Fed’s urgency now, albeit a bit late, to attack inflation is going to normalize the economy or stock markets anytime soon.

Which goes back to what the Fed Chair never wanted to do – bring more uncertainty into the stock market than is warranted. The harsh reality is – “There will never be a dull day on Wall Street.”