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The Inflation We Have Now Is Structural

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In his Daily Market Notes report to investors, while commenting on inflation, Louis Navellier wrote:

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High-Stakes Meeting

Despite continuing high inflation numbers, a morning relief rally on hopes for de-escalation on the Ukraine border. Based on the reports that some Russian troops were moving away from the Ukraine border.  Other reports saw different military equipment being moved in. No one is really sure what high-stakes game Putin is playing here. 

Obviously, if you're Vladimir Putin, you want to be nice to Germany because that's going to be your biggest client. And Germany needs the gas. So, the meeting between the German chancellor Olaf Scholz and Vladimir Putin would be fascinating and maybe we'll get more relief rallies if that meeting is well received.

The stock market also took the news as a positive development and all the major Indexes opened up over 1% while gold and crude oil fell. 

Structural Inflation

This bullishness is despite further affirmation of strong underlying inflation trends with the PPI (Producer Price Index) coming in much hotter than expected.  Up 1% for January, twice the expected 0.5%. Core rates (which excludes food, energy, and trade services) were also much higher than the forecast of 0.4%, coming in at 0.9%.

A lot of the inflation we have now is structural. It's service cost related. It's built-in. It's going to be very, very hard for the Fed to unwind that type of inflation.


The other comment I have is the Fed did meet yesterday. The discount rate was on the agenda. I would not be surprised in a subsequent Fed statement that they're going to raise the discount rate along with the Fed funds rate. Discount rate's not a big deal. It's an interbank thing, so don't worry about it.

But James Bullard, the St. Louis Fed, still remains very outspoken as he was demanding higher rate increases. But folks, wholesale inflation's running 9.7%. The core rate's running 6.9% in 12 months. If they raise rates to 1%, that doesn't do it. Obviously, they can't raise rates much beyond that because Europe is ultra-low. Japan is zero. We're doing modern monetary theory. That's unlimited money printing. So, whether that's right or wrong, that's what we're doing.

Tempering the threat of such high inflation numbers - and where that might lead the Fed in its stated objective to tame inflation trends - is that yesterday the New York Fed survey of consumer expectations saw a surprise drop in one-year inflation expectation from 6.0% last month to 5.8% and three-year expectations from 4.0% to 3.5%

The US Treasury ten-year yield spike to 2.056% on the news but has cooled to 2.038%. It's encouraging that the market, in particular the more vulnerable tech names, can mount a rally in the face of the continuing high inflation statistics. 

The stock market is an oasis for inflation. Obviously, we've had great guidance going forward. So a lot of investors have concluded that earnings work and stocks are great inflation hedges. Hang on and enjoy the ride. We've still got some more good earnings to come. 

Coffee Beans

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