Q: Everything keeps getting more expensive. Why has the market improved? Inflation still seems like a big problem.
A: We are still seeing inflation in many areas (just go to the grocery store), but what the market has responded to is a decline in the rate of inflation. Over time, prices almost always go up. What hurts is how quickly prices have increased over the past year. To see that rate of price growth slow is welcome news.
The market is a leading indicator, showing us what investors anticipate. Expectations of slower inflation have led to more investor optimism. There are good reasons for this optimism. Brad McMillan explains:
“…while strong employment has kept demand fairly high, the stimulus payments have been spent and real wage growth has been negative, taking it down from the levels of six months ago. Supply chain problems have largely eased as well, and even the energy and goods cost spikes have faded. Finally, interest rates have moved sharply higher, the effects of which are already visible in the housing market. From all three inflation drivers, we have now moved down to perhaps one, in the form of demand. That’s a big change.”
Whether that investor expectation proves true will not be known for a while. In the meantime, the normal ups-and-downs will continue.
