Inflation Has Everyone on Edge – What Comes Next?


In a continuation of the first quarter, stocks and bonds struggled to find any sort of traction in the second quarter, leading to one of the roughest six-month starts to a calendar year on record. As stewards of client capital, we understand how difficult and challenging these last six months have been and we continue to work to ensure portfolios are properly positioned for successful outcomes over the long term. Markets have gone through numerous ups and downs over the course of centuries. No matter how often an investor goes through the bad times, it never feels especially comfortable. There is no easy path to wealth creation or preservation, and we should all recognize that volatility is a byproduct of the human impact on markets.

Contributing to this year’s volatility have been two particular headlines – inflation and central bankers’ responses. We will discuss inflation in this letter given its uncomfortable persistence over the past 18 months and touch upon the Federal Reserve’s ability to respond (or not) accordingly. As we have written previously, though, inflation is a tricky topic to understand and trying to package it into an easy framework is exceedingly hard. A complex set of circumstances collectively brought us to today and the unwind is not going to be straightforward.


2022 will largely be defined by one topic (at least thus far) – inflation. Earlier in the year, we explored inflation in our blog, "Puncturing Inflation," in which we discussed it being incredibly hard to measure, to understand, and to control. There was some vindication to that stance recently when the Federal Reserve’s own Chair Jerome Powell said, "We understand better how little we understand about inflation." Truer words have possibly never been spoken. With that preface, let’s at least discuss how we arrived here, what we see happening, and what might occur in the quarters ahead.

Many of the seeds of today’s inflationary pressure were originally planted in early 2020 as the government sought to stem economic collapse during the initial COVID-related closures. The response funneled more than $2 trillion of stimulus into the economy through the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The goal was to provide relief to businesses, families, and individuals impacted by the closures, job losses, and reduction in economic activity. It was, in part, a necessary support mechanism and lifeline for the economy. That’s when things started to get complicated.