While many analysts dismiss the recent rise in inflation, the key figure to watch is the rate-of-change, writes Landon Whaley.

This week’s “Headline Risk” focuses on the risk of buying the Old Institution’s obsession with the “levels” of data rather than the far more important rate-of-change (ROC).

Let’s begin with an inflationary victory lap. We initially made our “inflation will accelerate from here” call back on March 11. Right on cue, both consumer and producer price inflation accelerated in March for the first time in six months. We updated the Rockin’ Reflation macro theme on May 6 saying, “This Friday, we’ll get the April readings for all three inflation gauges, and we expect to see another sequential acceleration in both consumer and producer price inflation, and maybe even an uptick in core as well.”

Boom goes the dynamite!

April’s inflation readings confirmed that consumer inflation accelerated for the second consecutive month, producer prices hung tight at a five-month high, and even core inflation showed an impulse, jumping to a three-month high.  

Despite this inflationary rate of change reality, the Old Institution is once again naval gazing levels and missing the signal within the vast sea of noise.

First, Dallas Fed President Kaplan took to the CNBC airwaves to downplay the recent inflation readings saying, “It’s not that we don’t have any inflation...Inflation forces I think are going to be muted…”

That interview was followed by a litany of news sources describing the latest U.S. inflation readings as “muted,” “tame,” and “benign.”

This type of economic “analysis” drives me up a wall!

Words like “muted,” “benign,” or “tame” are loaded. They have meanings that may help the old media get clicks but may not be accurately describing the trajectory of the data set in question. Do these words convey that U.S. inflation has now accelerated for two consecutive months for the first time in 12 months, and all three primary gauges are sitting at multi-month highs?

In addition to being loaded, these types of words highlight the Old Institution’s preoccupation with the “levels” of economic data, rather than the far more informative rate of change (ROC).

Remember, their “levels” obsession means they fail to spot shifts in Fundamental Gravities until months after the fact. By the time the data has deteriorated (or accelerated) to levels that send them a clear signal, asset classes have already responded to the new economic conditions. In short, by the time the Old Institution acknowledges the changed environment, the low-risk, high-reward trades are as dead as disco.

The headline risk bottom line is that data isn’t muted or benign, and it’s certainly not tame; those are opinions. Data is either accelerating or slowing; those are facts.

U.S. inflation is accelerating for the first time since May 2018, and this is a critical development because it means the U.S. economy is now experiencing a Fall Fundamental Gravity, which dramatically changes the playbook for successfully trading U.S. based markets.

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