Suddenly, it seems investors are worried that inflation rates have stopped declining. That’s because yesterday, we learned that consumer price inflation rose from 3% to 3.2% in July. And then today, we learned that producer price inflation also rose in July – from 0.2% to 0.8%.
And stocks are reacting negatively to this news.
But in reality, if we want stocks to go higher, we need inflation rates to stop falling and start stabilizing.
Indeed, do you know what’s worse than inflation?
Deflation.
Inflation Is Actually Ideal Here
Deflation creates a vicious cycle wherein consumers delay purchases because they are anticipating lower prices, which leads to lower economic activity, more price cuts, and more delayed spending.
This is probably most easily illustrated with a quick Google search for “deflationary spiral.” It was what essentially killed the Japanese economy throughout the 1990s and 2000s. And it was also the primary driver of America’s darkest economic period: the Great Depression.
Point being: We don’t want deflation. It is actually much worse than inflation.
And if inflation rates keep declining, we’ll fall into deflation.
So, despite CPI and PPI data highlighting a month of higher inflation, that’s actually bullish!
In June, the producer price index rose just 0.2%. Just 0.2%! If that number fell further in July, it would be negative. And if it kept falling throughout the rest of the year, we’d be firmly in deflation territory.
We don’t want that.
Instead, we want inflation to stabilize here – and it is.
The Final Word
With producer price inflation now stabilizing at pre-pandemic levels, we’re getting an ideal outcome for stocks.
No inflation. No deflation. No problems.
So, though the market is having a negative knee-jerk reaction to the end of the disinflation cycle, it is actually quite bullish for stocks.
Wall Street will soon realize this. When it does, stocks should roar back into their 2023 uptrend.
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On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
