Inflation

Some very preliminary signs inflation deceleration may be slowing, and CPI is now probably understating current levels of inflation. In 1983 two versions of CPI will be reported with CPI-U substituting rental factor for mortgage rates and home prices. However, COLAs and Social Security will remain tied to the old version.

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It’s time to start looking but too early to start buying. In this issue the groundwork is laid for being ahead of the crowd in timing a potential move back into the traditional inflation hedge stocks. A new conceptual stock grouping is introduced (The Inflation Resurgence? Index) and the current status of some inflation monitoring tools is reviewed. If a re-entry can be timed well, a profitable tactical move may be in store sooner than most now expect.

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Combining historic P/E multiple levels based on various inflation environments, with “normalized” earnings for S&P 500 and DJIA, twelve-month potential for DJIA could be 1177, 151 for S&P 500. More realistic level might be 1115 for DJIA and 143 for S&P 500. However, Bonds might well provide even greater total return.

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Spring has come to Minnesota (kind of) and The Leuthold Group finds it has made some errors in one of its historic inflation charts. A corrected version in included.

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Federal debt and its close relationship to inflation is tracked from 1791 to date. Clearly the two are intertwined. Unless some fiscal sanity prevails in Washington, the nation may be in a hyperinflationary mode before the decade is past, regardless of the current cyclical downtrend.

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