Inflation

Key Points 

• Is inflation a short-term (or transitory) effect of the pandemic, or something more sinister and longer-lasting. 
• There are headwinds and tailwinds for inflation, both short-term and long-term. 
•  History shows the impact of inflation on stocks is felt more within the higher-valuation segments of the market. 

 Although Jerome Powell and other Fed members have been selling the “transitory” narrative; it doesn’t mean markets might not have continued volatility eruptions until the narrative is clearer. 

Globalization was a contributor to disinflationary trend of the past few decades, with de-globalization it is set to do the opposite. 

There are countervailing forces acting as headwinds for inflation as well; helping to explain why the debate about the stickiness of inflation rages on. One is “creative destruction (disruptive technologies),” especially with regard to technology-related innovations and disruptions. The wealth divide—which has been exacerbated by the pandemic—is also an inflation headwind. Lower income households have much less ability to save and often live paycheck-to-paycheck; while the upper income households have a much higher ability to save, and tend to spend less as a portion of their income.