Debunking the Latest Inflation Worries

By TradeSmith Research Team

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By now you’ve seen the headlines: Inflation ticked higher.

The latest CPI reading for August ramped to 3.7%, coming in well-north of July’s 3.2% level.

This hotter-than-expected print sent the bears growling, suggesting this level of a inflation will be a problem for stocks.

But is it really a problem?

Today we’re going to answer this question by looking at data.

First let’s take a stroll down history lane. Let’s review all inflation readings since 1960 in the chart below. As you’ll notice in light blue, inflation was anchored for most of the ‘90s through 2020, hovering in the 2%-4% range.

More recently, inflation has fallen mightily in 2023 after surging last year. The arrow points to the latest upmove in CPI.

Also included in the chart is the Fed funds rate, which has recently inverted vs. CPI:

Source: BLS.GOV, Tradesmith

While inflation did indeed tick higher, it’s important to understand why.

After you breakdown the components that make up the CPI calculation, gasoline was the single largest contributor to the increase.

If you’ve filled your car up lately, you know what I mean. You’ve felt the pinch.

Below outlines all inflation items from last month. In red, I’ve boxed what’s important: gasoline prices rose over 10% in August.

Source: BLS.GOV, Tradesmith

That’s a big gain indeed! This should come as no surprise given that Crude oil has been on a tear since July.

Crude oil futures hover at the highest levels of 2023:

Source: YahooFinance

Ok, so now that we know why inflation is gaining, let’s now focus on what it means for stocks going forward.

Are equities doomed as the pundits say?

The decisive answer is a resounding NO.

Don’t take my word for it. Let’s prove it!

The Data Tells the Tale

For this historical study, we’re looking at all CPI levels back to 1955.

Today’s CPI print of 3.7% doesn’t suggest stocks will fall off a cliff as many fear. In fact, inflation readings between 2%-4% show a forward gain of 11% for the S&P 500 over the next 12 months.

This means that even if inflation ticks up to 4% in the coming months, which is possible, expected gains are the same!

Only when inflation rises above 6% do we see average negative returns for stocks. The surging inflation reading of 9.1% in 2022 is case in point! Check it out:

This analysis debunks the latest inflation worries and shows why data offers a better perspective than headlines ever will.

I say, buy into the fear.

History is on your side.

At TradeSmith, we take an evidence-based approach to investing.

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