Inflation

The Bull wrote several times over the past couple months that inflation was probably peaking. That is now being confirmed by recent declines in both the consumer and the producer price indices. Lower inflation is welcomed but may not come smoothly. Expect some back and forth, but the trend looks decidedly lower.

Higher interest rates may have helped, but high prices also played a role. Remember the adage, “the cure for higher prices is higher prices.” Eventually, demand must suffer as certain items become less affordable to more and more consumers. More careful use as well as substitution begins lower consumption. This applies to services too. Necessities crowd out wants, and people find many ways to economize. For example, Americans are now using less gasoline than at the height of the pandemic; imagine that.

The Federal Reserve will probably continue to raise short-term interest rates. The Bull and his partners always believed that they would want to quickly get back into the neutral range of around 3-3.5 percent. That is still our expectation, no matter how quickly inflation comes down. Remember, the neutral range is where rates are neither accommodating nor restrictive. Finding that range is not a science but an art. We are close.

If higher than desired inflation remains sticky, then even higher may be required. We do not believe that to be the case. Inflation retreating is good for investors. Longer-term projections are more reliable, and planning can be useful. Investors have already sniffed out that better days are ahead; stay steady my friends.

El Toro Solo