Inflation is back in the news. The latest reading of the consumer price index (CPI) came in at 3.5 percent. Does this mean all is lost in the Fed’s fight and it is time to sell everything? No, of course not. The worry on Wall Street is that higher inflation means that interest rates will go higher, and this will drive stock prices down. We have consistently made two points which still hold true: The first is that it should surprise no-one that the last 1 percent of inflation will be the most stubborn.
This rise from 3.2 percent to 3.5 percent does not mean that the battle is lost, and the Fed must keep rates higher. Nothing in nature goes in a straight line and inflation will always vary from month to month.
The other point we have made is that interest rates are simply trading in a range. We were near the lows of that range when I wrote that and sure enough, now we are heading to the top of the range. Interest rates on the 10-year Treasury are trading around 4 percent; they have gone as low as 3.8 percent and as high as 5 percent and are now near 4.5 percent. This is closer to the top of the range, and they will likely head back down closer to 4 percent once more. Could they break out of the range and keep rising? Anything is possible, but it is not likely. As of now, nothing has really changed. We remain in a range, and we are still on course.
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