by Greg Valliere, AGF Management Ltd.
INFLATION WON’T STAY above 8% this summer — if for no other reason than more favorable year-over-year comparisons which will begin to kick in. Yesterday’s bond market rally seemed to indicate that the inflation threat may ease soon, based on just one data point — core inflation rose by only 0.3% in the last month.
WE’D LOVE TO JUMP ON THE BANDWAGON and conclude that the threat has peaked, but there are two reasons to be cautious:
First, the war in Ukraine will not end soon. Vladimir Putin asserted yesterday that negotiations have run their course, with Russia prepared to fight until a “full conclusion.” Eastern Ukraine is in grave danger but an assault on Kyiv could last for months, keeping upward inflationary pressure on fuel and food; the latter may experience high inflation well into the summer.
Second, the U.S. labor market will stay red-hot. With a jobless rate of 3.6% now, perhaps headed lower, it appears that full employment has arrived. And there are still acute shortages of workers (truck drivers in particular) that will crimp the supply network and force employers to raise wages and benefits. Full employment could persist for many months.
BOTTOM LINE: We wouldn’t be surprised to see inflation gradually decline to 4% by late this year, a great improvement over this spring, but still not low enough for the Fed. By a year from now the Fed’s bitter medicine should cool off prices — and the overall economy.
BUT WE WON’T BELIEVE INFLATION HAS TURNED A CORNER until the war is over and the labor market has cooled off — and those two crucial ingredients do not appear to be imminent.
The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.
The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.
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This post was first published at the AGF Perspectives Blog.
