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U.S. Inflation Trends

- May 16, 2022

ECONOMIC BACKDROP

From “fighting” low inflation for over a decade, policymakers now must deal with the unfamiliar problem of inflation (now at 40-year highs)

Growth peaked in 4Q 2021 while inflation is expected to have peaked in April and should decelerate, but remain high, through the end of the year

House prices are continuing to make new nominal highs and have surpassed the peak of 2006 on an inflation-adjusted basis

CPI rose 8.3% Y/Y, above consensus estimates; Food, electricity, and shelter were the largest contributors in April

Inflation across categories is mixed, but undeniably broadening out

The labor market—a trailing indicator—is healthy with permanent job losses approaching pre-pandemic levels

The majority of pandemic assistance programs expired in September 2021; Continuing jobless claims have now dropped to below pre-covid levels

Misery index (inflation + unemployment) has continued to rise as inflation moves higher, highlighting the risk of stagflation

Consumers aren’t enjoying the current inflationary episode as much as policymakers hoped they would

The foundation for the current policy mistake (too much accommodation), was two decades of the Fed missing their 2% inflation goal

Legacy pandemic issues, overly accommodative monetary/fiscal policy, supply chain issues has pushed inflation to a 40-year high

The combination of adding financial stability to its mandate, the pandemic, and the employment backdrop also caused the Fed to overreact

M2 money supply jumped as a result of fiscal response to pandemic, peaking at almost 30% year-over-year in 1Q21, collapsing lower now

Fed may have less ability to curtail inflation as Russia invasion and China zero policy COVID lockdowns impact supply chains

Forward indicators continue to suggest worryingly high inflation for some time

Market-implied inflation expectations have spiked and remain elevated after correctly predicting inflation would not be transitory

The “good” for inflation is that if financial conditions continue to tighten, which would be bad news for risky assets, growth may slow down enough to tame inflation

Equities have generally responded favorably to increases in Fed balance sheet and moderate inflation, but inflation has moved beyond “moderate”

The Fed is falling further behind the curve & unless inflation rolls over, will be forced to hike into an economic slowdown and possibly into a recession

Periods of high inflation have substantially eroded real returns for investors

Historically, inflation has been a significant issue for the stock market when it is above 4%

We believe the multi-decade trend favoring deflation over inflation assets has turned and will revert, in fits and starts, in the coming years

The extreme policy backdrop raised the risk of holding cash over the long term and created an epic incentive to take risk, which may be unwinding

Physical gold and silver still look attractive when adjusted for inflation

Gold has had a mixed relationship with inflation; the correlation between the two has been choppy since the start of the COVID-19 crisis

Crude oil and inflation have an extremely tight historical correlation for obvious reasons

APPENDIX

ASSET CLASS CORRELATIONS (10-YEAR)

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DEFINITIONS

Asset class performance was measured using the following benchmarks: U.S. Large Cap Stocks: S&P 500 TR Index; U.S. Small & Micro Cap: Russell 2000 TR Index; Intl Dev Large Cap Stocks: MSCI EAFE GR Index; Emerging & Frontier Market Stocks: MSCI Emerging Markets GR Index; U.S. Intermediate-Term Muni Bonds: Bloomberg Barclays 1-10 (1-12 Yr) Muni Bond TR Index; U.S. Intermediate-Term Bonds: Bloomberg Barclays U.S. Aggregate Bond TR Index; U.S. High Yield Bonds: Bloomberg Barclays U.S. Corporate High Yield TR Index; U.S. Bank Loans: S&P/LSTA U.S. Leveraged Loan Index; Intl Developed Bonds: Bloomberg Barclays Global Aggregate ex-U.S. Index; Emerging & Frontier Market Bonds: JPMorgan EMBI Global Diversified TR Index; U.S. REITs: MSCI U.S. REIT GR Index, Ex U.S. Real Estate Securities: S&P Global Ex-U.S. Property TR Index; Commodity Futures: Bloomberg Commodity TR Index; Midstream Energy: Alerian MLP TR Index; Gold: LBMA Gold Price, U.S. 60/40: 60% S&P 500 TR Index; 40% Bloomberg Barclays U.S. Aggregate Bond TR Index; Global 60/40: 60% MSCI ACWI GR Index; 40% Bloomberg Barclays Global Aggregate Bond TR Index.