US inflation data came out on Tuesday and was hotter than expected.

Suddenly everyone cared again. Markets sold off hard, bonds yields soared:

• The two-year Treasury yield rose 17 basis points or 0.17%.

• That sent the S&P 500 falling 1%.

• Our favorite small caps fell even further!

Funny how that happens. Just when everyone is convinced inflation is beaten and doesn't matter they walk right into a report that confounds the "inflation was so 2022" take.

We never seem to learn. We are always and inevitably surprised and stunned by an event that was always perfectly possible.

Markets get scared by the unexpected not the actually scary. The list of very legitimately intimidating events right now is quite long (war, terrorism, climate change, authoritarianism, inequality, fraught elections etc) and yet it is a small yet meaningful jump in prices leads to the worst selloff in weeks as investors got caught assuming that inflation was yesterday's problem.

That to us, is the most important lesson from this week's fun. If you are wondering what could truly get investors to take fright in 2024 it is the prospect of higher inflation - and therefore maybe more interest rate increases - that will do it.

And then, suddenly, the panic was all over.

The day after the CPI report (Wednesday) everything began to climb again - almost as if nothing had happened in the first place.

• The S&P 500 rose up over 1%.

• Smaller and more vulnerable US companies climbed even more.

• US bond yields fell, prices rose etc.

Not just that but some of the hottest stuff out there was the least affected.

The smoking hot Nvidia - a company we have covered a few times - was only down 0.17% on Tuesday and by Wednesday lunch was back up 1.6%. it ended the day up 2.46% which shows that, at least for now, not inflation, not Vladimir Putin, not Cerberus himself can stop the "AI stocks only go up" thesis right now.

US stocks rose again on Thursday as well.....

It wasn't just Nvidia either. US small cap stocks recovered their entire Tuesday decline on Wednesday-Thursday. Therefore you didn't need Nvidia's sexy sizzle and monopoly power to get investors buying in.

What is going on here?

We don't think it is that complicated though we do think it is worrying.

Three main questions:

• Is inflation actually rising again?

• Does it matter?

• Why?

The shortest answers are "yes," "yes" and "maybe though not what some might think."

In longer form: US inflation is climbing and there is not much doubt about that. Regardless of whether you are looking at it over 3 month, 6 month or annualized basis, the US CPI is rising or nearly rising:

We have written about this challenge a few times. The last mile of getting inflation down is always the hardest and could be especially this time due to various structural factors like demographics, the climate transition and inflationary government policies such as "Buy America" and red tape provisions in the Inflation Reduction Act.​

The latter is pretty close to a perfect definition of irony. It is one thing to misname an Act because you hope to sell it to an already very skeptical public. It is a whole other thing to have it accomplish the very opposite of what you intend.

As the bumper sticker hopefully suggests: Make Orwell Fiction Again!

As loyal readers may remember, our argument in the past has been to expect roughly 2-4% inflation in your personal and investing lives going forward. That still seems broadly correct in 2024. As is simply very difficult to get inflation at or below 2% without people losing their jobs.

2-4% may not seem like much but is roughly double the 0-2% inflation from 2010-2020 period. If prolonged, it will have a very significant impact on more than just the prices at your local grocery store.

Furthermore, if that is the case, it will be a significant change for the economy, for consumers and for policymakers and society at large. For details on those implications, however, we turn to our next question.....

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