Markets tumbled on stinky inflation data… But follow the trend.
So share markets were rocked last week when the inflation data in the US came in hotter than expected.
The US market fell over 4% in a day. The Aussie market followed, and closed the week down 2.5%.
The inflation print wasn’t great, as falling fuel prices were off-set by rising prices for groceries, shelter and medical care. Household electricity bills were also up by 15.8%, year on year, the biggest jump since 1981.
What’s worse, Core CPI – which is the measure central banks have their eye on – jumped up to 6.3%, from 5.9% in July.
And that’s what really threw markets into a tizz.
The Fed had raised rates by 75 basis points (three times your average move size) for three meetings in a row.
Markets had hoped that cooling inflation might put super-sized rate hikes behind us.
But nup.
Suddenly, some economists were talking about the Fed maybe hiking rates by 100 basis points at their next meeting.
Markets did not like that idea. Not at all. And tumble they did.
And it does seem that those who were hoping that inflation would be brief and transitory are now disappointed.
Inflation, like a bad fart, is hanging around.
And rates are rising the world over.
Over in Europe, the ECB raised rates by a similarly sized 75 basis points, after hiking by 50 basis points in August.
You won’t believe how high official interest rates in Europe are now.
0.75%.
Yep. They were zero last month.
And negative 0.5% the month before that.
(They’ve been negative since 2014.)
To me, this highlights two things. One, everyone is freaking out about hikes, but globally rates are still incredibly low.
Second, the current bout of inflation comes after decades of secular disinflation – decades of inflation going down and down and down.
And interest rates, like a dog chasing it’s tail, following inflation lower and lower.
That secular disinflation is just what happens in mature economies, as our abilities to produce things more cheaply outpaces our desire to buy more stuff.
And going forward, what happens?
Well, more of the world’s economies are maturing. China, Asia, Africa…
As that happens, secular disinflation returns.
And so after we get on top of the current bout of inflation, disinflation will return.
And with that, lower interest rates.
And in a few years, interest rates in Europe will be negative.
And a few years after that, in Australia too.
That’s the trend.
And as they say, when it comes to investing, the trend is your friend.
JG.
V says
It is an impressive analysis, especially “secular disinflation” impresses a lot.
“The trend is your friend” is something to really remember, but it seems to me that the trend is what everyone sees, rather than what someone predicts or anticipates.