Inflation has now spiked for the fourth month in a row. On Jan. 12, the U.S. Bureau of Labor Statistics (BLS) reported that the annual inflation had reached 7.0%, as of Dec. 2021. This was the largest 12-month increase since the 12 months ending June 1982. That is almost 40 years ago (39.5 years).
You can see the BLS data in the table below that the BLS puts together each month.
I wanted to see what the trend has been, so I put together a table. Here is what I found.
CPI inflation of 7% in Dec. 2021 (for the prior 12 months) was up from 6.8% in Nov. 2021, 6.2% in Oct., and 5.4% in Sept. 2021. You can see how inflation has been spiking on an annualized basis in the graph I have put together below.
This shows you that the annualized inflation rate is now slowly moving up. Look how tame the 2020 CPI numbers were compared to what has happened in 2021.
And just in case you say that the monthly numbers don't support a continuation of a 7.0% rate, let's look at that more carefully.
Yes, the month number for Dec. was just 0.5%, which was lower than the Nov. number of 0.8%, and the Oct. 2021 number of 0.9%. But consider this. If we compound out 0.5% for 12 months, the annualized rate is 6.17%.
Moreover, the average monthly rate in the past 6 months has been 0.567%. That compounds out to 7.0% on an annualized compounded 12-month basis.
Inflation Is Not Transitory
The truth is that food and energy costs are not just what is pushing up CPI inflation. In fact, the BLS reported that after excluding the food and energy index, CPI inflation was still 5.5% in the last 12 months. In other words, the base inflation rate is still highly elevated.
These high inflation rate numbers will draw the attention of the U.S. Federal Reserve Board. The stated goal of the Federal Reserve Act is to prevent inflation (i.e., to promote "stable prices"). As a result, it is very clear that the Fed will likely raise rates in order to dampen inflationary expectations.
That is going to raise costs across the board, at least for the short term. It could also slow down economic activity. In the end, that is not good for stocks, especially highly valued growth stocks.
But it could take time for this to happen. For example, I suspect that investors still are not sure that inflation is here to stay. That is why a look at the graph that I have prepared above clearly shows that it has started creeping up.
Some investors criticize this way of thinking about creeping inflation. Their attitude is that once supply-chain disruptions ease inflationary pressures will ease. But, in response, others say that inflationary pressures today are not transitory.
In fact, in Dec. 2021, Fortune magazine quoted both Fed Chairman Jerome Powell and Treasury Secretary Janet Yellen as saying that inflation trends are no longer transitory. Chairman Powell said that inflation could "linger well into next year" (referring to 2022).
Investors Could React
As a result, don't be surprised to see lower price-to-earnings (P/E) multiples and much lower price-to-sales (P/S) ratios. This is because as interest rates rise (due to the Fed fighting inflation), cash and bond investments become more attractive. Institutional investors will reallocate out of high-growth stocks into higher-yielding income investments.
That could lead to a market correction in some high-flying stocks like Tesla, which has a forward P/E of 111 times 2022 earnings, and Block (formerly known as Square) at 70 times earnings. Other large-cap stocks that have high valuations could follow suit in any kind of market correction.
So, be careful this year, especially if you continue to see inflation rising. This could lead to a sudden decline in stock prices once investors become convinced that inflation is not going to be a temporary phenomenon.
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This is not financial advice and you should not rely on my analysis to buy or sell any stock, bond, REIT, or crypto, as I am not undertaking to induce you to buy or sell securities or financial assets or products.
I am relying on the “publisher’s exclusion” in the Investment Advisers Act of 1940 to provide this information without any personalized or individualized investment advice.
This represents my analysis of stocks, bonds, and cryptos in general and is not meant to recommend any specific security or financial product mentioned in this article, nor is it meant to provide you with specific advice in your own situation. I do not presently own any of these or related securities mentioned in the article, but I could buy some of these in the coming weeks.