This bull market is a little more than a year old. Historically, bull markets tend to last between a year and three years. Typically, bull markets end when earnings start to decrease, or the Federal Reserve starts raising rates due to concerns about inflation exceeding its desire to reduce unemployment.
Thus, investors should pay close attention to inflation measures. However, they should also determine whether the inflation is "transitory" or entrenched. Transitory inflation is when readings are temporarily high, and it can happen early in recoveries when there is a burst of pent-up demand or due to supply shortages. Entrenched inflation is more of a spiral in which prices and wages both rise in tandem.
Latest CPI Data
March CPI data showed that prices rose 0.6% from the previous month, and 2.6% from the previous year. This is the highest since August 2018 and a big jump from February's 1.7%. It was also above expectations of a 0.5% monthly increase and 2% annual.
Currently, the Fed has signalled that it will treat any inflation spike as transitory especially due to years of inflation being below-trend. Additionally, the coronavirus has led to many supply chain disruptions and shortages which may be exacerbating readings. Finally, there's also an impact from comparing figures to last year when we were at the depths of the recession.
Gasoline prices were the largest contributors as they surged 9% and accounted for half the increase. Compared to last year, gas prices are 22% higher. Food prices rose 0.1% monthly and 3.5% annually. Housing was another contributor to the rise of inflation.
Market Outlook
The Fed and Chair Powell have been adamant and vociferous for months now that they are not going to "even think about raising rates until 2022." Investors are starting to get the message as stocks were flat despite the higher than expected reading.
The challenge for investors and policymakers is to figure out how much of the inflation is due to strong demand and supply challenges vs the traditional definition of inflation which is too much money chasing too few goods. For much of the 20th century, inflation was one of the biggest challenges for policymakers. Over the last 30 years, it's barely been an issue with deflation a much more potent threat to destabilize the system.
In fact, the few times that readings were high such as late-2018 or 2008, the Fed did hike rates and was forced to quickly reverse these hikes as the economy started to significantly slow. From 2009 to 2011, inflation readings were once again on the high-end but the Fed was correct in labeling it as transitory and kept policy rates low. As supply ramped up to take advantage of higher prices, readings fell as well.
This time, the Fed is following the same path. But, there are some key differences such as the size and scope of fiscal stimulus. Additionally, the economy is much closer to full output this time around compared to 2009.
