Inflation was up 0.5% in January and the CPI was up for 6.4% from the same period last year. Both numbers were higher than expected and have predictably caused the Federal Reserve to reflect and take a more hawkish stance. Shelter, Food and Energy remain the primary culprits boosting inflation numbers, of which shelter represents approximately 50%. While the markets anticipate a decline in shelter costs over the year this has proved stubbornly resilient to date. The next meaningful economic data announcements this month include "retail sales", the "monthly jobs report" and the consumer price index report for February.

You may be wondering why this article is titled "Will the Fourth Industrial Revolution Kill Inflation" and that is because we are on the cusp of paradigm shifting innovations which will unleash a "productivity revolution" unlike anything that has come before it. The combination of AI, Robotics and Quantum Computing to mention just a few will reinvent what is possible. The current Quantum Computer in development at Google is purported to be 158 million times faster than the fastest supercomputer on the planet. That is an unfathomable leap. AI (Artificial Intelligence) is expected to double in its capacity every 6 months. At the most rudimentary level, these technologies combined with advanced micro-devices that have the potential to monitor every item and point on any supply chain, will not only address "supply chain" imbalances but altogether drive logistical, material and sustainable efficiencies across entire industries. By addressing supply chain issues, one of the main contributors of inflation, we will see these technologies contribute powerful disinflationary forces.

However, while we are on the cusp of this 4th industrial revolution which has the potential to dwarf every previous industrial revolution combined, the current impact is in its infancy. Over time, the combination of the technologies mentioned, and many others have the power for generating exponential innovation and one of these changes will be a generative global disinflationary economic impact.

Happy New Year! We hope that you enjoyed the festive season and time with family. As we begin another year it is worth reflecting on our good fortune that we are living in an era of remarkable advances in health care that have prolonged the average lifetime. In 1875, the average life expectancy in the USA was 40 years old. By 1960 (85 years later) the average life expectancy in the USA was 69.77years and in 2019, it was 78.79 years. Life expectancy has almost doubled since 1875. It has fallen since 2020 due to the increase in mortality rate resulting from COVID and currently stands at 77.28 years in 2022. Men typically on average have a lesser lifespan reaching approximately 74 years of age whereas women on average live to about 80 years. As medicine advances at an exponential rate with the convergence of quantum computing, biotechnology, genomics, regenerative medicine, research and many other related disciplines, the pace at which healthcare is advancing is accelerating and we can expect the average life expectancy to keep rising alongside these advances.

This is, of course good news for human beings but it also means we need to plan for living longer. As we live through the great inflation since the advent of COVID and a challenging bear market, it's important to revisit retirement plans on a regular basis and re-calibrate if needed to realize the retirement you are planning for.

An important factor that will influence your retirement income are social security benefits and the age you start claiming them.It is important to understand the financial implications  of when you choose to claim social security. For example, it is estimated that overall benefits, on average, will be approximately 76% higher (inflation adjusted) if you start claiming social secuirity at the age of 70 versus the age of 62. That may be counter-intuitive but when you factor in the early-retirement reduction penalty and conversely the delayed retirement credits (DCR's) that increase your retirement by 8% per annum for each year through the age of 70, this is not the case. Only 7% of all retirees wait to claim social security until the age of 70 despite this.

Has the inflation tide turned? Core CPI was forecast to increase 0.3% month-over-month and 6.1% for the year but came in recently at 0.2% and 6% respectively. Food on the other hand (which is not part of Core CPI) has continued to rise as have the costs of shelter.

In the bond market, long-term Treasury yields are starting to fall. Analysts are projecting that these will continue to fall into 2023. The 10-Year Treasury yield topped out at 4.3% a few weeks ago and finished at 3.49% a few days ago, down more than 80 basis points from its peak.

Also of note: The U.S. ISM Manufacturing PMI has declined over the last few months into territory below 50 which signals falling demand. Each time the index has fallen below 50 - over the past 50 years - the 10-Year Treasury yield has proceeded to fall over the following few quarters, notably this also occurred during the era of high inflation of the 1970's. Falling treasury yields have an inverse correlation in the past with higher risk beta stocks rising

It is interesting and worth noting that since World War II, stocks have not sold off in the year folowing a midterm election. There are no guarrantees that history will repeat itself but in the 20 midterm elections since World War II, stocks have risen the following year between 5% - 32% depending on the year. In 14 out of the 20 years following the mid-term election cycles the markets have risen by more that 10%.

Why is this? "Post-election outperformance is often driven by the market's expectation of increased government spending from a new Congress," says Liz Ann Sonders, Schwab's chief investment strategist. "But an additional infusion of funds seems unlikely this year, given the government's historic levels of spending and stimulus in response to the pandemic" 

Other perspectives say that equities tend to disappoint in the years before the election and that once anxiety about potential policy changes post-election subsde that there is a reversion to the mean. 

Markets are cyclical. That is an undisputed fact backed up by hundreds of years of statistical proof. Capitalism is known for it's boom/bust cycles, periods of market expansion fuelled by cheaper credit followed by recessionary forces, tightening fiscal conditions and economic contraction. In recent years we have seen the lowest rates in US history coupled with the greatest injection of money into the economy in US history to avert the COVID induced economic global crisis.

The impact of supply chain disruptions, demand/supply imbalance, labor shortages, higher wages and QE squared has been the most feared outcome of all to economists, namely "Inflation". Inflation left unchecked destroys the economic fabric and "value" of currency in a country. As the word's reserve currency, the Federal Reserve will do whatever it takes to bring inflation to heel.

We have gone from record low interest rates of less than 1% to over 4% in a comparatively short period. 30 year mortgages have hit a new recent high of 7%. Just over 18 months ago you could get a 30 year mortgage for 2 -3% depending on your credit. The substantial rise in rents, food, energy, cars and most goods and services over the last three years are not a mirage. The poor and middle classes are significantly affected by this.