Friday's Market Minute: The Bears Continue To Capitalize On Inflation

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It has been a rather strange week as financial markets whipsawed over the developments in Ukraine, and the threat of tighter monetary policy weighed on any broad-based bullish investor sentiment. The bears remain firmly in control of the prolonged market correction that began last November. Just a month ago, no one wanted to touch gold. Now, gold has suddenly become the flavor of the month as investors scramble for insulation against geopolitical risks and uncertainty over the magnitude of tighter monetary policy. 

Central banks have little control over supply-driven inflation, and the risk to economic activity and demand are real based upon the expectations of up to six rate hikes this year. The Fed minutes on Wednesday offered little new information on that front, although some committee members warned about the risks posed to markets and the wider economy by tightening policy too quickly. Inflation is high, but it’s coming along with rapid economic growth and strong demand, which is good. However, high inflation is often associated with high volatility of inflation, and this can make people uncertain about what inflation will be in the future. That uncertainty can eventually hinder economic growth. Additionally, it adds an inflation risk premium to long-term interest rates, and it complicates the planning and contracting by business and labor that are essential to capital formation. 

Inflation has become the key focus of investors, which will eventually impact consumer spending and business outlook regardless of the direction of monetary policy. Until inflation shows signs of decelerating and Fed policy becomes anchored toward modest interest rate movement, markets will have a tough go at a sustainable recovery.

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This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.