Inflation remains in the spotlight. But often absent in the debate is the economic growth backdrop at the time of rising inflation pressures; especially as it relates to equity market performance. According to economists at Charles Schwab, some inflation pressures are already easing; with attendant impact on affected industries’ stocks’ performance. Signals from the bond market, wage growth and productivity are key to the outlook for inflation looking over the medium-term.
Inflation genie to be kept in the bottle
“At least in the near-term, the surge in economic growth expected for the second quarter serves as an offset to the upward pressure on inflation. In addition, the bloom may already be coming off inflation’s rise if search activity is considered.”
“As the second half of the year unfolds – and assuming employment trends continue to improve and supply shortages are alleviated – a continued move down in prices may coincide with some easing of inflationary fears.”
“While CPI increases from one year ago have undoubtedly been strong, the changer over two years disputes the notion that we’re seeing a high and sustained increase in prices. Inflation remains well below levels seen during the Global Financial Crisis, and nowhere near the stratospheric climb in the 1970s.”
“Much of the sell-off in the growth-oriented areas of the market earlier this year was driven by the rise in real rates into March. They have since come down and drifted sideways. That has given the growth trade some more breathing room. Importantly, though, while some cyclical and value-oriented areas have eased their ascent, they haven’t come down meaningfully; confirming the strength in both the prospects for the economy and the continued durability of value factors’ leadership.”
“Wage growth remains subdued. High double-digit percentage increases in workers’ pay preceded the hyperinflation of fifty years ago. Not only are we not seeing that this time, but we’re also in a different labor environment. The number and power of unions has waned, global wage inflationary pressures have eased, and technological innovations have boosted productivity.”
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