Not to be outdone by Tuesday’s CPI surprise, this morning brought an equally hot PPI release. But these days the market media zeitgeist is better understood through the models of drama and psychology than finance and economics. It wants, seeks, craves, inflation. But only so long as it’s asset prices doing the inflating. Once consumer prices inevitably join in, the public grows restless and policy threatens to derail the gravy train.

The Federal Reserve plays an integral role in this tragicomedy, alternately and at once hero and villain. It opened its latest act by donning its white shining armor and riding to the rescue in the wake of the deflationary crash of 2020. It wielded an epic inflation bazooka, defeating the deflation dragon in a matter of weeks. But instead of sheathing its weapons and declaring victory, it kept on shooting, pumping round after round of monetary bullets into deflation’s motionless corpse.

Financial media celebrated as the dollar plunged and asset prices soared. Then a funny thing happened. As 2021 wore on, consumer prices began to join the party.

The first reaction was denial. The belatedly recognized inflation was “transitory”, they said. The inflation bazooka continued to fire. Denial gave way to anger, depression and bargaining as first the bond market began to hike rates, and the Fed was finally forced to follow.

And … scene. Asset price inflation reversed in 2022. This led to declines in the rate of consumer price inflation in 2023. This in turn led to breathless anticipation that the policy bogeyman would wither. Unable to resist, the Fed capitulated, and adopted the Wall Street narrative as its own, reinforcing speculation it would soon return to its normal inflationary ways. The bond market cut rates, and another round of asset price inflation took flight, pumping another impulse into the consumer price inflation pipeline.

The first tentative signs of its emergence had already begun to appear at the second derivative level in 2023. The rate of consumer price disinflation began to slow. This second derivative message being unsupportive of its beloved easy money, Wall Street media kept its focus firmly on the first.

That was the first indication of emerging denial as well. But far from the last. On Tuesday the January 2024 CPI release showed inflation picking up at … ouch … the first derivative level. On Friday the PPI reinforced this message.

But media are digging in on denial, unprepared to move forward. The rate cut narrative has only grudgingly shifted its timeline even as the facts shifted in direction. Even with money supply having also resumed inflating anew, the price data are said to represent a “bump in the road” on an otherwise smooth glide path to a 2% utopia where asset prices can gallop ahead at 20% per annum rates while consumer prices creep at a quiescent, decimated pace.

But isn’t “bump in the road” just another way of saying “transitory”?

In which case history repeats but does not rhyme.

It doesn’t have to be inevitable. But for this story to have a happy ending, one more cathartic sequence of dismay, depression and dealing has to happen first.

No cycle ever ends with denial.

Asset prices must disinflate again for consumer prices to do likewise. For the analytical groundwork, see CPI – A Lagging Indicator Of Inflation.

It’s always easier to say what won’t happen than what will. What won’t happen is the S&P merrily continues on its way to 6000 while CPI, PPI, PCE etcetera soft land in 2% heaven. My best guess as to what will happen is stocks take another 10%-20% or so leg down this spring or fall or both, and only then does consumer price inflation yield.

Then rates fall, asset price inflation resumes, consumer price inflation follows suit … rinse … repeat …

The next shoe to drop? The shorter term is always the longer crap shoot, but the odds are markets take a dip over the next few days and weeks as the Federal Open Mouth Committee tosses meager droplets of cool water on the inflationary fires it so imprudently restoked with gallons of gasoline mere months earlier.