Inflation Continues to Chill Out

It’s rather amusing how many people are predicting the imminent return of hyper-inflation. On these matters, I prefer to be a realist. We haven’t had much inflation and it doesn’t appear that we will any time soon.

The Labor Department reported this morning that inflation actually fell by 0.1% last month. Economists were expecting no change. The core rate, which excludes food and energy, rose by 0.1% and that matched expectations.

Here’s my preferred way of looking at inflation. This is the monthly core rate which is seasonally adjusted and annualized:

My point is that you can see a clear rising trend of inflation. We’re not so concerned with one or two outliers, but a trend tells us something. That trend, however, peaked in May at 3.5%. Since then, inflation has gradually crept back down. In September, it dropped to 0.66% and last month, it was 1.64%.

What does this mean for stocks? Lately, the stock market tends to move in alliance with inflation expectations. But expectations of inflation and inflation aren’t the same thing. Historically, the stock market isn’t much concerned with inflation that’s below 5.3%.

Posted by on November 16th, 2011 at 10:31 am


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