Investors Should Still Brace for a Period of Elevated Inflation

Reports of moderating consumer prices could be misleading.

Headline inflation reports are trending lower, and various media outlets argue the worst is behind us.  

It is true that the rate of inflation is moderating, but the absolute levels remain high and more importantly, most Americans are still feeling the pinch when paying for goods and services.    

It is important to understand how spiky inflation, or “spikeflation,” has played out in the past. After World War I and World War II, and throughout the 1970s, inflation was persistent and pervasive. The rate of inflation didn’t go up and then land softly, it spiked, returned to manageable levels, then spiked again.  

In the 1970s, the consumer price index was nearly above 5% for an entire decade. Go to the grocery store and see if your bill has fallen 50% as CPI has over the past year. The media often likes to play on the pace of inflation declining, but we believe it is disconnected from the real story, which is an elongated period of higher prices.   

This CPI chart portrays elevated levels of inflation lasting for a good 10-15 years in the 1970s. 

We think portfolios should be positioned in preparation for another scenario of elevated inflation. Ironically, the price to earnings ratios for commodity equities and natural resource stocks are trading around 8-10x, which is 50% cheaper than the S&P 500 index.  

However, investors have gone back to the winners from the last decade, like high growth and technology stocks.  

In the past few weeks, there has been a broader value rotation. We think the broadening market leadership can continue, provided the recession is punted down the road. We remain concerned about the slowing business cycle, high earnings in the U.S. and another spike in inflation.  

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