Inflation: Don’t Pop the Champagne (Yet)

Key Points

  • Even though inflation fell below 3% in the first half of 2022, let’s not celebrate too early as there is a possibility of inflation rebounding later in 2023.

  • Inflation is not always transitory, it’s just one of a wide range of outcomes (and historically has not been the norm).

  • Investors are cautioned not to be overly optimistic about inflation and to be prepared for the possibility of higher inflation in the future.

With inflation now running below 3%, many are breathing a sigh of relief, perhaps thinking, “I’m glad that’s over!” But let’s not be overly hasty in popping the champagne corks. Early this year, we predicted that inflation could recede below 3%, and rebound sharply, all in the same year.

Most observers are thrilled when they correctly forecast whether stocks, bonds, inflation, or GDP is likely to go up or down. We had the chutzpah to forecast that inflation would tumble and rebound. Because last year's 6.5% inflation happened almost entirely in the first half of the year, we told our investors that there would likely be an illusion of tumbling inflation in the first half of the year, perhaps even falling below 3% by midyear, then an illusion of soaring inflation in the second half of the year. Both the benign first half and the daunting second half are illusions, because they are based entirely on the months that we are replacing from 2022.