Key insights
- The author argues that markets are underestimating the lagged impact of rising energy prices on broader inflation, despite readily observable price increases in food and delivery services. They suggest sophisticated market participants are aware of impending inflation but are intentionally ignoring it, leading to a market surge disconnected from economic reality. This disconnect poses a bearish risk to US equities as future CPI reports may reveal higher-than-expected inflation.
Although the March CPI report came in at 0.9% mth over mth with a 10.9% increase in energy, markets reacted fairly positively to the report because inflation didn't materialize in other items. Core only increased 0.2% and food was actually flat. And the way the stock market has moved the past 2 weeks suggests it believes overall inflation will continue to be pretty moderate.
But anyone with common sense knows that it takes time for rising energy prices to leak into other items. Oil didn't break $90 until March 6 - obviously non-energy prices in March wouldn't be immediately impacted.
We don't even need to wait for the April CPI report to know how prices are moving in reality. I can physically see in supermarkets that vegetable prices are literally 2x what they were a few months ago. Prices of meats and snacks have also very obviously increased significantly. Amazon, UPS, and all other delivery companies raised prices and implemented fees at the beginning of April due to higher oil prices. If it's this easy to tell that inflation is about to show up massively across the board in upcoming CPI reports, why are stock and bond markets pretending it won't happen?
Large institutions, market makers, and the federal reserve are extremely sophisticated. They clearly know what's coming, so why are they intentionally ignoring it and allowing the market to continue surging?