Inflation Over the Long Term
--
Inflation as measured by the Consumer Price Index is at its highest in four decades. As a result the US Federal Reserve is belatedly raising interest rates. More often than not the Fed ends up causing unemployment and even an economic recession as it overshoots in its attempts to stem inflation. We have seen this coming here at Top Gun Options and predicted last year that this year could be a disaster. One of the issues to consider besides how badly the economy will be hurt and how far stocks will fall is how inflation will be over the long term.
FREE: Get Our Daily SITREP (Situation Report) Newsletter
University of Michigan Long Term Inflation Expectations
Economists at the University of Michigan routinely conduct polls to assess inflation expectations. Their Index of Consumer expectations has three areas of focus. These are consumer views of their own financial situation, their expectations for the general economy in the coming months, and their expectations for the coming years. The survey consists of fifty questions designed to track expectations and attitudes of consumers. Five hundred or more interviews are conducted each month by telephone and the study is designed to be statistically representative of all American households.
July University of Michigan Inflation Expectation Results
The recent polls by these folks have been the highest in a little over a decade and the July results were in the same ballpark with expectations of inflation going up just under three percent over the next five to ten years and costs rising five and two-tenths percent in the coming year. Their statement that accompanied the report noted that labor markets are softening and that consumers are increasingly preoccupied with inflation. Roughly half of those who responded to the poll said that inflation was affecting their personal finances which is the highest since 1951! And the consumer consensus of economic outlook was the worst since 2009 during the Financial Crisis. Their measure of consumer expectations came in the worst since 1980 which is the last time that inflation as measured by the CPI was as high as it is now.
Inflation Expectations Feed More Inflation
Those of us who were around in the 1970 remember things like going to the garden store in October to buy supplies for the next spring because prices were likely to be significantly higher in a few months. This sort of behavior, instead of buying less or waiting a few months to see what happens tends to keep inflation going up. When that thinking is applied to buying a car or a home it has even more effect on the economy that buying a garden hose and packets of seeds. This is part of why the University of Michigan inflation expectation results are important and especially useful for those of us who trade options and are keeping an eye out for how the economy will be and how the market will be performing in a few months hence. The folks at U of Michigan mirrored our comments in saying that consumers find ways to cope with expectations of increasing prices, job insecurity, and the rest. They alter their spending patterns by either holding onto their money or buying early in order to “get ahead” of expected inflation. On one hand the Fed waited too long to raise interest rates and all of the “rescue spending” related to the Covid recession and crash served to overheat the economy. On the other hand, all of the trumpeting of inflation news and expectations in the news cycle serves to convince folks that prices are going up a lot and forever and that they had better buy now before everything gets too expensive or they lose their job! For Americans this is a tough situation and for Options traders this is an opportunity. Now is a good time to join one of the trading squadrons at Top Gun Options where we potentially print money no matter which way the economy and market are headed.
