We were having such a good time, weren’t we? After dropping more than 20% from the beginning of the year through mid-June, the market staged a convincing rebound as investors seemingly saw fit to look beyond the complexities of central bank policy, maybe trusting that inflationary forces could be weakened and might otherwise work themselves out over time. That rebound has stalled, but one shouldn’t be surprised. Investors need not forget:



* With sources of rising and otherwise still-high prices so diverse, there’re no quick fixes to present challenges* Impatience is understandable as trends remain indecisive. Even so, we’ve begun to see favorable shifts in the data, which lend credibility to the current courses of action* But there’s always a tomorrow. Facts can change such that more or less effort and/or time may be required for inflation to return to tamer levels, and employment and growth may suffer as a result* Meantime, stock and bond markets likely will remain volatile as investors take varying cues from fresh data as they arrive



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A Bit about Inflation…



Putting the current rate of inflation in context, we see that the U.S. consumer has not seen a rate of change in prices this high since the 1980s. The surge comes after more than a decade of reasonably calm inflation, the rates of which rolled around the collectively desirable 2% range, a level set for its not-too-cold/not-too-hot tendency to give folks little reason to pay attention to it. But a collection of forces applied upward pressure on prices after the initial global COVID shutdown. First, that shutdown brought global supply chains to a near standstill. From raw materials to finished goods, product deliveries stalled and often halted, leaving final supply low relative to demand. Since scenarios in which levels of demand exceed supply tend to see prices pulled higher, inflation began to rise. Well before those supply chain challenges began to ease, though, governments around the world provided vast fiscal and monetary stimuli to jolt their economies back to life. These funds tended to enhance demand—in many segments beyond what otherwise might have been desired without the excess funds—further expanding the mismatch between supply and demand. Next came the war in Ukraine, which wreaked further havoc on supply chains just as they were beginning to gain post COVID-crisis momentum. Particularly hard hit were grains and other foodstuffs sourced from Ukraine (again, lower supplies for a given level of demand). Energy supplies—for Europe most starkly—were crimped by a combination of sanctions-related import restrictions on Russian oil and gas, and Russia’s restrictive responses to those actions. Various other mostly raw material (e.g., raw and processed metals) and some finished goods (e.g., a range of automotive goods) saw shipments slow or cease as Ukrainians focused attention on the war.







The Levels, They Are A-Changin’



What’s important to remember about inflation, though, is that it is a measure of the change in prices, not the level of prices. That is, prices may remain high in historical context even as inflation drops. The American Automobile Association shows the average price of a gallon of regular unleaded gasoline in the U.S. at $3.841 on August 31.