Barron’s: What Inflation Could Mean for the Market




Listening to CNBC today I heard the first little flashes of legitimate inflation concern. Just glimmers.

It looks like wages are rising – finally. Keep a close eye on the percolation. I’ll be watching the #inflation hashtag on Twitter much more closely this year.

This is how it goes folks. The Fed keeps the burner on for too long and… Well, we’ll see.

(From Barron’s)

Remember inflation?

Largely absent during the economy’s eight-year recovery from the financial crisis, inflation is on track to pick up in 2018—and it might just catch investors off-guard.

For now, price pressures are benign, even as U.S. economic growth cruises into the new year at a 3% clip, with business-friendly tax cuts on the way. The core consumer price index, which strips out energy and food, was up just 1.7% year over year in November.

Economists have raised the specter of inflation for several years, only to be disproved time and again. There’s reason to believe, however, that 2018 will be different—that prices will finally rise in a more sustained pattern, forcing stock- and bond-market investors to react to a new trend. “An unanticipated acceleration in inflation is probably the biggest risk for markets in 2018,” says Larry Hatheway, chief economist at GAM Investments and head of GAM Investment Solutions.

Economists like Hatheway aren’t expecting runaway inflation, as in the days of disco and leisure suits, when prices rose by double digits. They’re girding for an annual increase of 2% to 2.5% at the most.

Yet the return of inflation would change market psychology. “You don’t really need inflation of a great magnitude here to get an inflation surprise,” says Don Rissmiller, chief economist at Strategas Research Partners. “Just a little bit more inflation from where we are today is probably enough to generate an inflation scare in 2018.”

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