2022 Theme: CPI Carnage - Why Does High Inflation Mean Lower Stock Prices In The Markets?

Friday was a powerful reminder that the monthly release of the US inflation data remains the most important date of the regular economic calendar

You are likely sick of it. We are definitely sick of it and yet its salience remains.

The carnage began on Thursday, in truth, as investors became nervous about the next morning's release and markets declined sharply. Despite the positive past few weeks and the almost normal amount of volatility, traders were very unwilling to hold a lot of risk going into the most important morning of the month.

The data, when it came confirmed those fears and then some.

The takeaways:

  • Highest US inflation in 40 years+ (1981).

  • Overall, US Consumer Prices increased 8.6% year over year in May vs. 8.3% expected.

  • Core CPI was up 6% vs 5.8% expected. This number removes volatile items like food and energy.

  • 71% of the items in the CPI basket are increasing in price at an annualized pace above 4%. That is very high.

And this US price data coming in "hot" raised the likelihood of several immediate and practical outcomes:

The damage from this new information was swift and savage. Even assets like oil, energy companies and miners that have been performing very well in an inflationary environment struggled as they grappled with the fact that higher interest rates are a near certainty and the risk of a follow through hit on economic growth.


  • The most important sounds unspectacular but is incredibly important: The US Federal Reserve will continue to hike interest rates.

  • Any discussion (let alone debate) over a "pause" was just blown out of the water.

  • Expectations are rising for another large (0.50%) jump in interest rates in September as well as June and July.

  • The bounce in US stocks is likely over short term. Lower lows are a very high probability.

  • The "soft" landing rather than a hard landing of a recession has just gotten that much harder to achieve.

Put it all together and the fact that inflation is remaining high(er) is beginning to guarantee that growth will be low(er) in the years to come.

The probability of 70s style "stagflation" is also rising. That is also scary.

Away from the impact on the future rate path for US interest rates and the follow through there are some other, less practical but arguably more significant consequences as well

The most basic is this:

  • There is no above inflationary wage increase for nearly all Americans.

  • In fact, average US wages are now deeply negative.

From the outset of this newsletter, this is the scenario we have feared the most. There is no hiding this and there is also no dressing it up in better clothing and "well, what about...."

There just is very little "whataboutism" here.

It is just bad. Our economic institutions and policy makers have failed the average American and the consequences will be severe. They already are. The focus must now be on limiting the damage as much as possible.

  • A soft landing may be very difficult but it has to be our goal regardless.

Going forward, whenever you think about the economy, your portfolio or even just your general life, this chart continues to be the one to rule them all....

It is very difficult and possibly even unwise to find a silver lining here. We had hoped March might prove the inflationary peak but have been exceptionally cautious about believing that a few and very belated interest rate hikes would be enough.

Our hopes have been dashed and our fears have been confirmed.

But, if pressed, here is one possibility. The number is still very, very high but it is true that core inflation is down two straight months.

It isn't much to hang your hat on but if you want to be hopeful about something, the above is it.

Let us pray it continues and becomes a trend in the right direction.


Have questions? Care to find out more? Feel free to reach out at contact@pebble.finance or join our Slack community to meet more like-minded individuals and see what we are talking about today. All are welcome.


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