This topic is obviously quite sensitive given that inflation is something that affects a multitude of inputs in financial theory as well as the broader stock market.

The argument of late has been whether the new rates of inflation represent transitionary change [from covid] or a sustained increase in the CPI [due to money printing & stimlus].

I see a lot of investors arguing valid points on both sides. Those that argue inflation is just a short term reality usually centre their argument around the 'base effect' and how inflation is being measured on a PCP basis from this time last year where the CPI and general price levels were at lows due to the pandemic. I think it's a fair enough argument.

The issue I believe, is that the bond markets [particularly the US & AUS 10 year bond yields] are not pricing in a sustained level of inflation & thus interest rate increase(s). If it turns out that inflation is structurally here for a sustained period, than the bond market will experience a sharp shift as yields will rise. This will particularly impact growth stocks more than value as per the impact on cash flows over a longer period.

The elevated P/E multiples of many stocks will be at risk of serious damage due to the change. Stocks such as XRO, ARB, APX, REH that have been long time wealth winners are trading on multiples way above their long term average. I'd imagine they will be most at risk.

To conclude, if inflation is transitionary then the deflated bond yields will be correctly priced and theoretically nothing material will happen. [No gain, no loss]

If it turns out that inflation is structural then bond yields will likely experience a sharp correction and theoretically the stock market will take a hit as money flows out of equities and into bonds. [no gain, sustained loss]

So it represents to me a loose, loose situation if you are heavily geared towards growth stocks.

Remember when: What have we learned from the 1980s and that 21% interest rate? - The Globe and Mail

Intresting Candian perspective 

Hi Mark

I find your post interesting in that you believe people will be able to retire on their intrest in a high inflation environment. 

From my memory A home average small home was 55000 k not the 1000000 price tag of today eg only $7600 mortgage not $160000 as it would be here today.To.me its a little scary the sums and figures.

 The last recession in the early 1990s the flow on affect was higher rates of unemployment. And wage growth stagnate 

I think that yes retires did have better bank intrest rates to retire on but the flip side was fewer jobs and high rates of unemployed youth and older workers near retirement still found things tough.

I guess its the memory of personal experience of the time that creates the memory's 

Watch the debt levels and neich companys some.may take a flogging.

Have a great weekend.

US inflation last month looks like it was above expectations and the market barely reacted compared to last month when the results were better. In my opinion it is a great example of the craziness "Mr Market" and a case for just focusing on the companies that you are investing in.

Links below have the current figures and items. I still think it may be a supply side issue but interestingly many food related items increased significantly this month. The graph looks like inflation is starting to go exponential, this months figures will be important. As per above doesn't really change how I invest but I think you do need to be mindful of what the market is thinking especially with regards to your index type investments.

I think inflation causing a rate rise is the most likely risk that could trigger a sell off of equities. Interested on others opinions about what you see as the largest general risk at the moment?