Inflation Is Back or Did it Never Leave

The latest inflation report just confirmed what markets were already starting to price in inflation isn’t dead it’s geopolitical now. March’s Consumer Price Index (CPI) came in hot, rising 0.9% month-over-month and pushing annual inflation to 3.3%, the highest level in nearly two years. The culprit isn’t complicated it’s oil, and by extension, the war.

The ongoing conflict involving Iran triggered a disruption in the Strait of Hormuz, one of the most critical oil chokepoints in the world. Roughly 20% of global oil supply flows through it, and when that gets threatened or shut down, prices don’t gently rise they spike. We are all feeling it at the gas pump with gas over $4 in a lot of states.

Energy is the input cost of everything. When it spikes, it eventually bleeds into food, goods and services. This is where things get complicated for the Federal Reserve. Before this report, the narrative was inflation is cooling, rate cuts are coming and a soft landing is possible. If they cut rates too soon, they risk fueling inflation again. If they hold or hike, they risk choking the economy.

Here’s the part traders should be paying attention to. This isn’t demand driven inflation. This is supply side, war driven inflation which are the hardest to fix. You can’t raise interest rates to reopen the Strait of Hormuz. You can’t cut rates to produce more oil. We need the geopolitical risk to be solved through peace talks. With this current administration I have little faith that this can be accomplished, but I'd like to be surprised.

The bottom line is March’s CPI report wasn’t just hot, it was a warning. Quietly, but significantly, Wall Street may have just fired the first real warning shot at private equity. A new credit default swap (CDS) index tied to private credit and by extension private equity has just been launched. If you’ve been around markets long enough, you know exactly what that means. If I could I'd be buying those CDS...