High inflation, yet stock market up (barely). Why is that? 7 reasons why:

Today's inflation rate was released and it showed the fastest rise since August 2008 with a reading of 5.4%. For the core CPI (excluding food and energy), the 3.8% rise was the largest jump since June 1992!

Yet the stock market was up a bit today despite this news. This would seem to be an anomaly. Or is it? We have been in a relatively tight trading range over the past couple of months and are flirting with all time highs. 

With inflation numbers such a the ones released the last couple of months, we would expect a bit more of a pullback. So why would the market simply shrug these off? Here are some possible explanations:

• Wrong base effect: maybe YoY comparisons aren't the ones we should be looking at given that May 2020 was a moment in time when things were at a standstill. We should probably be comparing with May 2019 or some period before the Covid-19 shutdowns (if we did that, the CPI rise would be about 1/2 of the current levels);
• Some stuff up, others less so: The largest price rises was seen in items such as used cars, airfares, etc... which got decimated during the shutdown. In areas that stayed open during the pandemic, such as groceries, prices didn't rise as much;
• The CPI will come back to normal levels in 2022: either through a combination of consumers not willing to pay up or resumption of a more normal economic environment, the large CPI numbers today will revert back to more normal levels in due course;
• Short term supply effects: chip shortages have caused production issues and hence raised the price on existing inventory. Once these are resolved, the production issues will be resolved and increased supply of goods will lead to lower inflation numbers;
• Fed had already indicated that this could be temporary: In the first week of June the Fed announced that inflation would rise but it shouldn't last and that they would hold off raising rates;
• Robust consumer demand/strong economy: yes prices are rising, but this could be a due to increased demand and the fact that the people should expect higher wages going forward (given the job openings to number of unemployed ratio is at all time highs). Some economists are predicting the strongest GDP growth since the early 1980s (albeit again from low levels);
• Strong corporate profits: the Q2 earnings numbers should be strong (and should remain so for the remainder of the year). Recent earnings reports have been very good as have the outlook statements.

Investors are choosing to look at today's inflation data with rose tinted glasses. Bottom line is that today the market is pointing to more bullish signs than negative ones, however we need to see a breakout above the mid 4200s on the S&P before we can resume an upward trajectory...