Connect with us

Economics

3 Reasons Why Inflation Is Nothing But a ‘Boogeyman’

Inflation — it seems to be the only thing that investors care about in 2022, and reasonably so. For the first time in 50 years, the U.S. economy is dealing…

Published

on

This article was originally published by Investor Place

Inflation — it seems to be the only thing that investors care about in 2022, and reasonably so. For the first time in 50 years, the U.S. economy is dealing with runaway inflation that just doesn’t want to slow down. Yesterday, we learned that it picked up again in May, rising almost 9% year-over-year. Unsurprisingly, that sent stocks spiraling lower.

Source: Elnur / Shutterstock

At this point, inflation seems to be the monster that everyone’s afraid of.

But what if I told you that it was more of a boogeyman than a monster? By that, I mean that inflation is actually just a red herring that will disappear altogether by year’s end.

Let’s dig deeper.

Core Inflation Is Decelerating

May’s Consumer Price Index (CPI) was so spooky to investors because it bucked the trend of slowing inflation.

That is, headline inflation rates dropped in April. Many expected them to keep falling in May – a sign that inflation has peaked. Instead, the headline rate actually rose.

Consequently, “peak inflation” hopes were destroyed, and stocks crashed.

But that may be the wrong conclusion altogether.

When you look closely at May’s CPI print, you quickly realize that the reacceleration of inflation was entirely driven by one thing: energy. Specifically, last month, energy costs rose dramatically. Gas and oil prices jumped. And electricity costs soared, too. Altogether, energy costs — which dropped 3% in April — rose 4% in May.

This flip in energy is exclusively why inflation reaccelerated this past month. Remove that jump in prices, and inflation actually cooled in May.

Core inflation — stripped of energy and food prices — rose 6.01% year-over-year in May, down from 6.13% in April and 6.44% in March. In other words, we’ve now recorded two consecutive months of slowing core inflation growth.

A graph depicting the change in core inflation/CPI YoY

Indeed, outside of energy, inflation is cooling. That’s a bullish observation because energy costs are cyclical and running toward all-time highs. And that means they’re due for a pretty big pullback over the next six months.

Therefore, so long as this deceleration trend continues, headline rates should meaningfully off into the end of 2022.

That’s exactly what will happen. And it’s exactly why I’m pounding the table on one inflation-crushing tech stock right now.

Demand Is Falling

We’re very confident that core inflation will continue to rapidly decelerate over the next six to 12 months. That’s for two reasons:

  • The demand side of the equation is falling apart.
  • And the supply side is revving back up.
  • You see, inflation got so hot because global economic demand was on fire. For about 12 months, global supply was constrained by production bottlenecks, regulations, COVID-19 restrictions, labor shortages, and more. This created a high-demand, low-supply situation that sparked runaway inflation.

    However, the opposite dynamic is beginning to emerge. We’re entering an era of low-demand and high-supply that will curtail inflation.

    In terms of demand, we’re seeing the U.S. consumer start to crack. Consumer sentiment this month plunged to a reading of 50.2, the lowest level on record. That means consumer sentiment is lower today than at any point during the 2008 financial crisis, the dot-com crash, the Iraq War, Black Monday, the Vietnam War, etc.

    Indeed, we’re at the lowest level in history.

    Obviously, consumers who are scared about the future state of the economy won’t spend much money. We can clearly see that consumer sentiment is a strong leading indicator of retail sales. Therefore, the current precipitous drop in sentiment will likely produce an equally steep drop in retail sales. And consumer spending drives 70% of the economy. So, if we get a big drop in spending, we’ll see a big drop in overall economic demand.

    A graph depicting the change in consumer sentiment and retail sales over time

    Net-net, economic demand will fall significantly over the next six months.

    While that might seem scary, I have a tiny tech stock that’s ready to grow right through this slowdown.

    Supply Is Rising

    In terms of supply, the world is starting to normalize.

    These days, COVID-19 lockdowns aren’t a thing anywhere except for China. And even there, the shutdowns aren’t lasting that long. Labor shortages are easing. Production capacity and output is dramatically improving everywhere.

    After two very weird years, the world’s supply chains are finally beginning to normalize.

    This can be seen by the New York Fed’s Global Supply Chain Pressure Index. It’s decreased significantly for the first time since late 2020.

    A graph depicting the change in global supply chain pressure over time, falling recently

    A normalizing supply backdrop coupled with falling demand implies that inflation rates will rapidly and significantly fall over the next six months.

    If that happens, I have just the stock for you.

    The Final Word on Inflation

    Some believe that inflation is an uncontrollable monster that will spiral the U.S. economy into a prolonged, 1970s-style recession.

    It isn’t.

    Instead, it’s a boogeyman that will quickly crawl back under the bed very soon.

    Consequently, you should be positioning your portfolio for a breakout rally in inflation-sensitive stocks. They’re being crushed right now. But as inflation proves to be little more than a boogeyman, those beaten-up stocks will soar.

    In particular, there’s one tiny $3 biotech stock that deserves your attention today.

    It’s a world-changing company trading at a lifetime discount. And once the current storm passes, it could realistically soar 10X or more.

    Plug into that next big tech revolution.

    P.S. Charlie Shrem and I will be holding an emergency briefing on June 14 at 7 p.m. Eastern, wherein we’ll discuss how the phenomenon plaguing the crypto markets could mint a new wave of crypto millionaires.

    Despite all the negative headlines we’ve been seeing, a new day is dawning. And a select few off-the-radar coins will emerge as the new leaders of the cryptocurrency markets.

    If you want to get ahead of this phenomenon, sign up for my free Crypto in Crisis event now.

    On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.

    The post 3 Reasons Why Inflation Is Nothing But a ‘Boogeyman’ appeared first on InvestorPlace.




    Economics

    U.S. Market Update: The Textbook Definition of Recession

    Although GDP growth is a crucial measure of economic activity, it is not the most significant factor to consider when predicting future stock market returns…

    Continue Reading
    Economics

    Why Are Cruise Stocks CCL, RCL, NCLH Sinking Today?

    Source: Shutterstock.com
    Interest in cruise stocks has remained high this year. However, most of the price action for this group has been trending downward…

    Continue Reading
    Economics

    The money-printing press has all but shut down

    Yesterday the Fed released the May M2 numbers, and they were good. Since the end of January, M2 has grown at an annualized rate of just 1.3%. Over the…

    Continue Reading

    Trending