After a decade of low and stable inflation (2011-2020), the reappearance of inflation in the early parts of 2021 was a surprise. While the Fed and administration were quick to dismiss the inflation surge as transitional, inflation has stayed stubbornly high into 2022. In this session, I start by presenting the history of inflation in the US, before drawing a distinction between expected and unexpected inflation. As investors have starting building in higher inflation into expectations, it is have economic consequences on interest rates, risk premiums and on the economy. I close the session by looking at how these changes are playing out stock prices, and how inflation behaves over the rest of the year will play out in market direction. In short, the inflation genie is out of the bottle and getting it back in will take more time and more pain than we realize, if history is a guide.
Blog Post: https://aswathdamodaran.blogspot.com/2022/05/in-search-of-steady-state-inflation.html
Index Valuation on May 5, 2022: https://www.stern.nyu.edu/~adamodar/pc/blog/S&P500ValueMay5.xlsx