Markets Better Prepare for Stagflation
Investors better wake up to the growing risk of stagflation. The coming weeks promise to deliver the verdict on how they should be positioned.
By all metrics, inflation is heating up. But it’s not clear the same can said for underlying economic activity.
According to producers, input costs have risen for six of the past eight months. And it’s not just big companies that are feeling pressure. One in four small businesses say they plan to raise prices, a 10-year high, according to the National Federation of Independent Business. Inflation’s persistence will finally begin to trickle through to consumers.
David Rosenberg, chief economist at the wealth management company Gluskin Sheff, recently quipped that investors “better say a prayer for Jay Powell,” the Federal Reserve chair. The deniers will dismiss the suggestion. But Rosenberg is serious, citing the core consumer price index’s March leap to 2.1 percent, a level that breaches the Fed’s 2 percent inflation target.
That would certainly grab the Fed’s attention and — critically for investors — keep the central bank in a tightening mode through the end of the year and into 2019. Notably, no single Federal Open Market Committee member voiced concern about the risk of inflation that is too low, the first time this has occurred since the Fed began making public the views of participants in 2011.
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