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Few topics  have the attention of traders quite like the specter of inflation these days.

In part this is because the stock market has gotten used to an era of low (if not very low) inflation. 

In the 21st century even the high inflation years have been low by historical standards, with inflation rarely climbing above 3%  and usually hovering between 1.5% and 2.5%. By contrast, throughout the 20th Century inflation would regularly climb above 4% and 5%, and often higher, according to Minneapolis Federal Reserve Bank data. Re-introducing those historic rates would come as a significant shock to the system.

Traders are also wary because inflation remains extremely unpredictable. Economists have no reliable models to forecast what will happen in the wake of mass disruptions like those caused by the coronavirus shutdowns. As a result, conflicting narratives of transient vs. long-term inflation have dominated economic news for most of 2021.

The Action Alerts Plus team recently noted on Real Money that sticky inflation is beginning to take hold.

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“One factor driving the view that inflation may not be so transitory is the supply chain, where continued challenges in port congestion and labor shortages have investors worried that third-quarter earnings and fourth-quarter profit guidance could disappoint,” the team wrote recently on Real Money. 

They added that “On the bright side, Merck  (MRK) – Get Merck & Co., Inc. (MRK) Report and Ridgeback announced … that their investigational oral COVID-19 antiviral reduced the risk of hospitalization or death by 50% for patients with mild or moderate cases. This news unlocked a strong rally in cyclically oriented and travel & leisure-related stocks as the development of this new drug represents one more tool that should help society return to normalcy.”

Two key areas behind inflation concerns have been supply chain bottlenecks and housing costs. As materials have become more expensive to ship, and take longer to arrive, companies have struggled to keep costs down on many of their finished goods. At the same time, an explosive housing market has pushed costs ever-upward for consumers.

The AAP team notes that both sectors remain volatile:

“Shipments for manufactured durable goods were down 0.5% in August to $256.1 billion, unfilled orders increased 1.0% in August, rising to $1,239.3 billion, and inventories increased 0.8% to $457.9 billion, led by a 0.8% increase in transportation equipment. With August’s readings, on an unadjusted year-to-date basis, shipments are up 14.1%, unfilled orders are up 4.0%, and total inventories have grown by 7.2% from the same period last year.”

In addition, the “National Association of Realtors reported that its Pending Home Sales Index advanced 8.1% in August to 119.5 (100 representing the level of contract activity in 2001). The reading exceeded expectations for a 1.3% monthly advance.