There is an economic term known as the Goldilocks economy, characterized by steady economic growth and low unemployment; not so hot as to push the economy into inflation nor so cold as to push the economy into a recession.
The Duck test is a form of abductive reasoning, making a probable conclusion from what you know from past experience. If it looks like a duck, swims like duck and quacks like a duck, then it probably is a duck….. is inflation this duck?
Goldilocks likes her porridge neither too hot nor too cold and with the perfect balance of oats (growth); milk (employment) and honey (inflation). A Goldilocks state is supportive of investing as companies grow, generate positive earnings and stocks perform well.
Today we are looking at the recent set of price increases; a 4.2% rise in US consumer price index (CPI) for April; a 1.9% CPI rise in the UK and a sharp rise in producer input prices around the world. We also know that when inflation rises beyond a certain point, history tells us interest rates tend to go up as well. Most Central Bankers are at great pains to tell us that this current bout of inflation is “transitory”; mostly due to short term factors such as a rebound in energy prices and short term impact of supply chain shortages as economies starts to emerge post Covid. Central Banks around the world have said they have no plans to raise interest rates short term and that may well be correct but the stock market likes to anticipate what will happen in the future. If inflation goes up strongly, then the cost of goods goes up and over time employees demand more pay and we then get wage inflation which is usually the trigger for rising rates.
Are the leading indicators actually a duck - the portent of high inflation? It’s a question to consider and the stock market is waiting with bated breath to see what Goldilocks thinks of the current temperature of her porridge……
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