Everyone is Wrong about Inflation



The US inflation rate is at a 30-year high of 5.6% but what's more important is how much inflation is going to be in the coming years. Because even if the S&P 500 $SPX500 returns 10% per year in the coming years and inflation is 5%, real returns are only going to be 4.7%. However, the predictions made differ. The Fed is expecting at 2.5%, TIPs breakeven rates are showing a little higher $TIPS , inflation swaps are even higher, Bitcoin $BTC and gold $GOLD enthusiasts are expecting hyperinflation, Cathie Woods $ARKK deflation.


The Federal Reserve System recently said that inflation is no longer transitory, which means that we should expect higher than usual inflation in the coming years. The Fed is the main reason why we're seeing this inflation and of course, they will be optimists.


Hyperinflation is very unlikely since the M2 Money supply only increased by 25% last year and the US Dollar remains the reserve currency of the world. Even deflation is unlikely as the increase in money supply will outweigh innovation.


Can the market predict inflation? No. I looked at past market predictions and then compared to actual inflation rates. The market is wrong most of the time.


How much will inflation be then? Nobody knows. There is a range of possibilities. That's why you should not build your portfolio expecting only one possibility. Build a portfolio that can work in any macroeconomic environment.



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