If you’re not a little confused about what’s going on, you don’t understand it

The only thing worse than yesterdays inflation report are my picks to win the British Open.  It's not even 10 a.m. on Day 1 of the tournament and my picks are already cooked - I can't catch a break!  Anyways, lets talk inflation. 

If we're playing politician, yesterdays inflation number left a lot to be desired.  If we're being honest, yesterdays inflation report was a complete disaster.

Consumer prices increased 9.1% versus last year.  You have to go all the way back to 1981 to find a time inflation was running this hot.

Lifting up the hood, the underlying categories that comprise the inflation index are all running hot (not a surprise given the headline number, obviously.)  For context:

Red = inflation is acceleratingGreen = inflation is slowing

Energy is the fastest growing inflation category, up 42% versus last year.  Airline fares are going nuts (+34%), cars are still expensive (new cars +11%, used cars +7%), and food isn't getting any cheaper (+10%).

If we're looking for silver linings, I'd argue vehicles prices are getting cheaper (used cars prices were up 41% in February and only 7% now), the growth in the "shelter" is beginning to flatten out month over month (mortgages rates up + affordability coming down should cool things), and then I'd make something up and say "Household Operations" (whatever that is) is decelerating quite a bit! 

The Fed will be forced to act on this inflation print.  The market (using CME Fed Watch Tool) is now pricing in a ~75% chance of a 100 basis point rate hike at the July 27th meeting. A week ago, it pegged the odds of that at 0%.  

The market is pricing in much of this bad news.  The S&P is in a bear market (down 21% YTD) and "the land of milk and honey" (i.e the Nasdaq) is down even worse (-29%). 

How much bad news is priced in?  Impossible to say other than generically saying "quite a bit". Earnings season  today with banks while the meat of earnings season comes next week.  Will be interested to see what news come from companies while fighting against a cocktail of 1) higher prices, 2) strong dollar, and 3) increasing cost of capital.  

I'll let Charlie Munger close this out... 

"If you’re not a little confused about what’s going on, you don’t understand it" - Charlie Munger