The Wall of Worry in Inflation

There’s a popular saying that stocks climb a wall of worry.  But one could also say that bonds also climb a wall of worry.  A wall of worry over inflation.  For years (really decades), there have been persistent fears of surging inflation.  And those fears just never come to fruition.  That doesn’t mean they can’t come to fruition in the future, but I do find these comments by Richard Bernstein apt:

“There appears to be a wall of worry with respect to inflation as well. It is unfortunate that investors have listened to politicians because printing money does NOT cause inflation. Economic textbooks say that printing money and using it to create excess credit causes inflation. The US is certainly printing money, but credit creation could hardly be called active let alone excessive. Thus, we view the risk of meaningful inflation as still quite low.

However, investors continue to perceive inflation risk to be very high. Our models currently suggest that investors are pricing nearly 6% inflation over the next twelve months into the valuation of the stock market. As Chart 5 shows, such expectations have nearly always been too pessimistic. The stock market appears to be climbing the inflation wall of worry as well.”


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Rik

    If investors are pricing in 6% inflation it is likely not with a normal distribution (or similar) but with a very fat tail at the high side. Which would mean that the prob. that it will be <6% is higher than 50%. Especially in these days.

    Doubt also if CPI (or something similar) is the inflationmeasure investors will de facto be considering. Likely more something that is similar to the inflation an investor is feeling. Which will most likely be higher than CPI.

  • Boston Larry

    It seems that bull market in bonds can continue while inflation stays low, and the risk of a big inflation increase is quite low.

  • Bond Vigilante

    1. “Printing money” on its own doesn’t create inflation.
    2. There’re forces that are a counterweight to a (sharp) rise in inflation and hence rising interest rates:
    – wage(s) (increases) consistently not keeping up with REAL inflation (taxation, food, energy, housing) since 1981.
    – household income remaining flat or going down. Household income rose from 1975 up to 2000 and peaked in 2000. The household income peak in late 2007 was lower than the peak of 2000.
    – increased productivity.
    – decreased money velocity.

  • Tyler

    I would love to have only 6% inflation in my life…but just about every annual bill has increased around 10% for me.

  • Joshua Wojnilower

    I recall Buffett incorporating ~2% inflation into his view for long-term returns. If investors’ expectations of inflation are too high, wouldn’t that suggest nominal earnings growth will actually be lower than expected? Hence, lower actual inflation would be negative for stocks?