Inflation Expectation's Lagging

Macro Perspectives: Tue 23 Feb 2021

Back in April of last year, a couple of weeks after the decision by policy makers (Fed and Congress) to go "nuclear" in response to the health crisis and economic shutdown, we discussed what this would mean for prices.

Here's an excerpt from my April 15 note…

"With trillions of dollars of relief/aid/stimulus money beginning to work it's way into the economy, the early stages of the global “asset price reset” is under way.

When global policymakers print money and drop it on your doorstep, the purchasing power of the cash in your pocket goes down - Inflation."

This is where we began talking about this theme: the "global reset of asset prices." - practically all asset classes have gone up (dramatically) in price since. Creating a mirage of wealth that's revealed in household net worth, which has returned to record levels.

The reset of prices has yet to be felt at the every day consumption level and that is what will put the policy response into perspective. Even with an improving job market, the rise in everyday prices will expose the wealth effect of rising asset prices, as a mirage - especially after another $2 trillion is poured onto an already heating up inflation situation. The consequence will be a lower standard of living.

Adding to the inflation pain, will likely be the fact that not many, still, are expecting it - as you can see in the chart below...

So the theme from much of last year, you don't want to hold cash in this environment - it’s value is being explicitly destroyed. Hard assets have a history of being the best protection in times of inflation, followed by commodities. On that note, we've talked about the historically favored inflation hedge, gold. We talked about the buying opportunity in gold last week, on the dip into the $1,775 area. Gold was a good mover yesterday, back above $1,800.