Overheating Ahead

The economy by itself is heading for higher inflation

Current US economic fundamentals suggest our portfolios remain correctly focused on assets that benefit from higher inflation. Late-cycle environments are generally characterized by rising inflation, and the current late-cycle is so far mimicking history. Chart 1 shows the increasing year-to-year change in the core and headline CPIs over the past year. The headline CPI is up 65% whereas the more stable core measure is up roughly one-third.

A late-cycle increase in inflation is normal. Product and labor markets tend to tighten, and delays and shortages become more common as increasing activity strains the limits of the economy. It took longer than normal for the recent US economy to reach these late-stage constraints because of the slow growth trajectory of the recovery and expansion. However, the business cycle has not been repealed, and inflation has been building as it always does during late-cycles.

Investors appear unaware of how high US inflation already is relative to inflation rates around the world. Chart 2 shows that the US currently has the highest inflation rate in the world among developed nations.

Core CPI and CPI YoY
(Jun. 2017 – May 2018)

Global CPI % YoY
(Latest Available as of Jun. 30 2018)

Source: Richard Bernstein Advisors LLC, Standard and Poor's, Bloomberg Finance L.P.