Inflation – Not going quietly into the night

March 18, 2024

The primary cause of the market declines in 2022 was inflation and the subsequent response by central banks. Rates higher, yields higher, stock prices lower… yuck. The stock market rally in 2023 was a bit more complicated but a big driver was inflation coming back down, opening the door for central banks to stop raising rates and for bond yields to stabilize. Yay. Now with 2024 well underway and the equity market up smartly, should we be concerned that inflation doesn’t seem to be going quietly into the night?
Last week, the U.S. Consumer Prices Index (CPI) data came in a bit warmer than expected by the consensus. The month-over-month change was 0.4%, both headline and core, excluding food and energy; this brought the year-over-year to tick up a bit from 3.1% to 3.2% and the core from 3.7% to 3.8%. This probably wasn’t a big deal; the equity market shrugged it off, and bond yields moved a bit higher in response. We could argue the finer details, such as insurance moving higher or shelter, but really, it was a lack of price deflation in goods. Good prices had been falling for the past six months, helping overall inflation come down. There was further evidence goods deflation may be waning in the Producer Prices data released later in the week. The market had more of a negative reaction to this information. 

It gets a bit more challenging as well due to base effects. Given more folks pay attention to the year-over-year inflation reading, this is poised to move higher. It had been moving lower partially because, for the past six months, the monthly number being dropped from a year ago averaged 0.4% (high-ish). So, any monthly reading below this 0.4% would result in the year-over-year reading falling. However, we are about to drop a number of months that averaged much lower inflation, so future months will need to be below 0.2% to see headline CPI fall.
 A resurgence of inflation, even if partially due to base effects, will likely see more folks talking up similarities with the 1970s. The 70s saw an initial move higher in inflation, which faded and then rose again. Please note I just jammed an entire decade of inflation into one sentence, which is an oversimplification. In reality, there were many twists and turns along the way. While this is certainly possible, we would point to a major policy mistake in the 1970s. The Fed started cutting rates even before inflation peaked. Of course, hindsight makes it easy to say this today. Recently, the policy mistake was to wait too long before raising rates and then to maintain a restrictive level as inflation has come down. Worth noting a recurring trend has been for the market to keep pushing expectations of rate cuts further out. 

Also, it's fair to say this just isn’t your 1970s economy. Even if inflation does pick up in the near term due to base effects, the trajectory should remain to the downside over the next year. Shipping prices have ticked higher, which feeds into goods pricing. Commodity prices have moved up recently as well. On a positive, if you look at factory pricing in China, this continues to be disinflationary. Yet most developed economies are more tilted to services than goods. U.S. CPI is broken down into 14% food, 7% energy, 19% goods and 60% services. The good news is services inflation doesn’t move around nearly as much as other components; the bad news is that it moves very slowly.


Despite goods inflation ticking up of late, investors should not read too much into this as it tends to be more volatile. More importantly, the lagged inflation components are starting to roll over. The two biggest drivers of services inflation, rents and wages, are cooling. Small business wage and price intentions are softening. This should help inflation continue to cool as 2024 progresses, albeit not in a straight line that can include some countertrend moves, like the one happening right now. 

Why All This Inflation Talk?


Inflation is essentially a tax on wealth; higher inflation makes everything worth less in real terms. This includes your portfolio. Even though we believe inflation is likely going to become lower, it may flare up further downfield. Many of the factors that helped keep inflation lower or moving in a downward trend during the past couple of decades have softened. Inflation may well become a recurring risk to portfolio and financial plans. Ensuring a reasonable allocation to asset classes that can help offset will likely become a larger allocation in the years ahead. This includes equities, more on the value factor, and real asset exposures.


More importantly, for today, any variation in the path of inflation can quickly translate into bond yields. The recent CPI and PPI prints triggered the 10-year U.S. Treasury yield to move up from about 4% to 4.3%. That may not sound like a big deal, but over the past year or so, the equity market has been very sensitive to bond yields when above 4%. What does that mean? Well, when bond yields have been below 4% since the start of 2023, there has been a weak relationship between the movement in bond yields and the stock market. However, when it was over 4%, this relationship became much stronger and more reliable.

This relationship will not endure as other factors will become more impactful. For now, though, the equity market does not like yields moving higher when above 4%. The good news is that when yields fall, the equity market will potentially rejoice, as it did when yields fell from 5% at the end of October to 4% by the end of the year.

Final Thoughts


Given our current view that this recent uptick in inflation will prove to be a short-term counter trend, we don’t believe the rise in yields will persist either. And should it move further, that may create another bite at the apple to add duration. Or even add equities if it translates into equity market weakness. For now, we are not getting concerned over the uptick in inflation data.

— Craig Basinger is the Chief Market Strategist at Purpose Investments


Source: Charts are sourced to Bloomberg L.P. and Purpose Investments Inc.


The contents of this publication were researched, written and produced by Purpose Investments Inc. and are used by Echelon Wealth Partners Inc. for information purposes only.


This report is authored by Craig Basinger, Chief Market Strategist, Purpose Investments Inc. 


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Is it over?

By Website Editor • June 17, 2024
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Crisis Alpha

By Website Editor • June 10, 2024
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This Ain't That

By Website Editor • June 3, 2024
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The Calm Before the Calm

By Website Editor • May 28, 2024
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More Bad News S'Il Vous Plaît

By Website Editor • May 21, 2024
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Is It Time for Emerging Markets

By Website Editor • May 13, 2024
The normal narrative for encouraging investors to look at emerging markets typically goes like this: The valuations are cheap, the demographics/rising incomes are supportive of growth, and they offer diversification. Perhaps this is more the marketing narrative. Kind of how, like for infrastructure strategies, they always talk about how many bridges need repairing. We are not refuting any of the above reasons, as they have been rather perennial for many, many years. And yet, for those who know us, we have been rather negative or at least cool on emerging markets for a long time. How long? Well, this negative view persisted for well over a decade. This is us giving ourselves a pat on the back since Emerging Markets (EM) have done roughly nothing for the past 12 years as Developed Markets (DM) have charged higher (chart).

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By Website Editor • May 6, 2024
Take your pick. There is no shortage of both good and bad news floating about the financial markets. To be fair, this is always the case. The hard part is understanding which side is stronger today and which side will be stronger tomorrow. With markets up low to mid-single digits following a very strong Q4 finish to 2023, most would agree the optimists are carrying the day at the moment. It is not just rose-coloured glasses; there is good news out there. Economic growth signs or momentum appear to be improving year-to-date. Dial back a few quarters, and the U.S. economy remained resilient while other economies softened or were rather lacklustre, including Canada, Europe, Japan, and China, to highlight some of the biggies. Today, while Canada is struggling, momentum in the U.S. has moved even higher, and there are signs of improvement in most jurisdictions.

Earnings Optimism

By Website Editor • April 29, 2024
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Energy Stars Align

By Website Editor • April 22, 2024
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Your Money & Your Heirs: What’s Your Plan for Wealth Longevity?

By Website Editor • April 17, 2024
As part of your wealth planning, have you considered your wealth’s longevity? Many of us have heard of the “shirtsleeves curse”: Family wealth is often built up and lost within three generations. You may not be surprised to learn that recipients often make “big” purchases within the first few weeks of receiving their inheritance. This is because many heirs are not focused on the longevity of new-found wealth. What are high-net-worth families doing to help prevent this loss? There has been an increasing focus on intergenerational wealth planning, with the objective of supporting wealth longevity. This involves getting existing generations to meet about their finances and form shared financial goals and values to help encourage lasting wealth. Here are some steps that can be taken as part of this planning process: Start with a plan and document it Start by thinking about your vision for your wealth for the generations to come. The plan should set out goals and provisions for how you wish funds to be used, accessed and replenished. For instance, you may wish for family members to invest in themselves to gain the experience needed to create and grow wealth, using funds for higher education or a business start-up or expansion. Others may wish to leave endowments to a charity. Once you determine your goals and provisions, it is important to formally record them as this document will be passed along to future generations. Communicate your plan Once the plan has been documented, it should be communicated to family members. Often, parents keep their finances and related values to themselves, missing the opportunity to pass along their ideals to children. While specific financial details need not be disclosed, sharing your vision is intended to be a catalyst for meaningful discussions. Some families use this plan to form a family constitution to help future generations carry forward their intentions. Engage in regular meetings Regular family meetings are intended to help cultivate family values based on your vision for your wealth. If wealth has been carefully built up through the generations, it may involve exploring family history. Or, you may use this time to educate children about finances and managing money or introduce high-level strategies to carry out the intergenerational plan relating to running a family business or a family giving strategy. Consider protection tools You may determine through family meetings that beneficiaries will need support. Certain tools can support beneficiaries to meet your goals, or protect future wealth in situations in which beneficiaries may not be capable. For example, a trust can put assets under the control of a responsible trustee, with the terms of the trust specifying the conditions, timing and amount of distributions to be made to heirs. Other tools, such as life insurance, can protect and grow assets while also providing access to cash. Setting up a support system of trusted professionals may help to ensure a successful wealth transfer, especially if heirs do not have the skills to manage funds independently. Monitor the plan’s success By having an ongoing dialogue with family members, you will be able to identify and address any gaps or concerns as they arise. You can also continue to define and refine family roles to ensure that your plan has a greater chance of success. Here to Provide Support While intergenerational wealth planning may not be for everyone, consider that creating a lasting legacy can be one of the greatest gifts you leave behind. If you need assistance with family discussions or educational tools to support children, please contact your Echelon Advisor.
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