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  • Writer's pictureIshfaaq Peerally

Inflation is Not Here Yet


US Inflation rate is currently 5.4% but there are diverging views on how high inflation is going to be in the future.


The first divergence on inflation is in its definition itself. Different people are looking at different types of inflation:

1. Monetary inflation - Increase in money supply, mainly caused by QE from the Fed

2. Asset Price Inflation - Increase prices of financial assets, a direct result of monetary inflation $SPX500

3. CPI Inflation - The most commonly used, increase in the Consumer Price Index, that is, increase in prices of goods and services

4. Core Inflation - CPI Inflation without food and energy prices $OIL


Why is the Federal Reserve System saying that Inflation is just Transitory? Last year we had a recession with a period of deflation. Therefore, it is normal that compared to last year, we will see higher inflation. It seems that even the market is expecting inflation to be transitory as the 10Y Breakeven inflation rate is only 2.5%. But as I showed in my newsletter last week, this market prediction is never accurate.


It is very unlikely that the US will see hyperinflation but higher inflation for a longer period is possible as most of the money printed by the Federal Reserve System last year has not entered the financial system yet. It has only been deposited in the banks. But once the banks start lending money to people, to businesses, then, the actual money supply in circulation will increase. Besides, government intervention might make that switch as well.


We can hedge our portfolio with Gold $GOLD or even Bitcoin $BTC but I would rather invest in businesses with low market correlation and good fundamentals, instead of basing my investments on macroeconomics, which is almost impossible to predict.


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