Larry’s note: Welcome to Trading with Larry Benedict, the brand new free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us.

My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. And, I’ve been featured in the book Market Wizards, alongside investors like Paul Tudor Jones.

But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it…

It’s certainly been a rocky road for the markets over this past week…

For example, the latest Consumer Price Index (CPI) print reported inflation increases of 6.2% this year – the highest in over three decades.

But, even before that, key indexes like the S&P 500 and the Nasdaq 100 had already rolled over and were heading down.

Unfortunately, the inflation story isn’t going away…

In the past few weeks, we’ve discussed how high growth tech stocks are particularly vulnerable to inflation. We’ve also looked at what happens when higher inflation flows into wages.

Today, I want to look at inflation from another perspective…

Why Expectations Matter

It’s no wonder the 6.2% (year-over-year) CPI headline number surprised the market, especially since it’s the highest inflation reading since 1990.

However, it wasn’t long before some of that focus shifted towards other numbers in the data, such as the monthly inflation reading… It rose 0.3% in August and 0.4% in September – but the 0.9% monthly rise in October was more than double the previous months.

Annualize that 0.9% out, and you’ve got an inflation rate of 10.8% if it keeps growing at the current rate. That’s a staggering jump compared to the beginning of the year when inflation was just 1.4%.

With food costs rising 5.3% for the year – and gas up a whopping 49.6% over the same period – inflation is deeply felt right across the economy.

That means more folks are becoming worried about the economy, and how a steep rise in inflation will impact their standard of living in the future.

So, while the markets are concentrating on the headline CPI number this week, my focus went to another inflation indicator that came out a couple of days earlier: inflation expectations.

Rather than look at historical data, it gauges expectations for inflation from households and small businesses to large corporations and Wall Street.

What this group collectively thinks about the prospect for inflation can be as important as the latest CPI data itself.

For example, take a business owner who needs to manage staff wages (and numbers), raw materials, and freight costs…

Inflation has a massive effect on all these costs – especially freight with fuel up nearly 50% this year.

If the owner thinks these costs are going to keep rising in the future, then they may start to increase the price of their goods in anticipation. And this can drive inflation higher in a self-fulfilling cycle.

And they might even put a hold on hiring extra staff in the meantime.

That’s why Monday’s reading of consumer inflation expectations really caught my eye…

This indicator has been rising all year. However, the difference between expectations and raw data really blew out during this past month.

Over the previous two months (August and September), inflation expectations came in at 5.2% and 5.3% respectively. That’s just 0.1% below the actual CPI reading for both months (at 5.3% and 5.4%).

However, the inflation expectation on Monday came in at 5.7% – a full 0.5% below the actual 6.2% CPI reading from Wednesday.

That means not only has this group expected inflation to rise all year, but inflation is now rising even faster than they were expecting…

And that could cause them to start jacking up prices sooner than expected, and to a larger degree.

All of this flows into the economy and the markets…

That’s why next week I’ll be keeping an eye on retail sales and the Redbook due out Tuesday (November 16). And, the reports on building permits and housing starts the following day.

When consumers worry about inflation and their future, it can put a pretty big dent in both. And like everything else, that will eventually affect the markets.

I’ll be sure to let you know if anything major stands out.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

Reader Mailbag

I’m always eager to hear enthusiastic feedback from our readers. Here are some of the latest comments…

Dear Larry,
I learn a lot about trading from your detailed technical analysis. Thanks for the great newsletter.

– Ralf

Larry, your years of “paying the dues of watching and then playing the markets” is so valuable for us wannabe investors. I read your take on the markets everyday it shows up. Thanks for helping us mainstreamers see our way through these changes.

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Excellent newsletter, and it’s refreshing to get value without a constant sales pitch.

– Lone

Larry,
I love reading your newsletter. I retired from FedEx after 28 years and had a great career there. I have a little feedback about your chip shortage article…

There are approximately 540,000 containers floating around the sea in front of L.A. and Long Beach… If the Secretary of Transportation can’t figure it out by changing the metrics, it will be impossible to ever get those containers on land…

Those chips from the Pacific Rim are going to arrive on FedEx and UPS aircraft. It’s going to take more than two years to flush out the system. Thanks for writing. I really enjoy your topics.

– Gary

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