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Investing Specialists

Inflation Accelerates, but It Isn’t the 1970s Again

Morningstar’s Bob Johnson thinks headline inflation could rise over the next year, but it is unlikely to trigger a recession.

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Equity markets generally continued to rally this week, especially the Russell 2000, which made a new all-time high. However, emerging markets continued to worry about what a Trump victory means and had another rough week. Bonds also continued to express their concern about Trump, with some rates, but not all, moving higher this week.  

Economic news this week was generally positive, especially on a month-to-month basis. Retail sales, industrial production, and housing starts all showed nice progress, lifting the cloud of impending doom that was hanging over many economic statistics. We do caution that most of these metrics made little improvement on a year-over-year basis, but they did not get any worse. Inflation did heat up, causing some concern, with the October data showing a 0.4% increase. (Most of today's piece focuses on why higher inflation worries us.) Clearly, U.S. Federal Reserve Board Chair Janet Yellen is also concerned, hinting that rates would move higher soon. The market seemed untroubled about the Fed this week, for a very refreshing change of pace.

This week's release of October price data showed acceleration across both year-over- year and month-to-month data. The month-to-month data looked particularly ominous, increasing 0.4%, which approximates a 4.8% annual rate. Year-over-year inflation was also at the highest rate of the year, 1.6%, slowly and methodically approaching the core inflation rate of 2.1% (excluding food and energy items), which has changed little over the past 12 months. Together, this seems like a reason for at least some worry, and suggests that the Fed may need to take action sooner than later. 

Robert Johnson, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.