Inflation comes in different forms - some transitory and others longer-lasting

Some speak as if inflation is monolithic. There are actually different types or forms of inflation based on where we are in the business cycle or what could be a possible supply shock. These forms can be intertwined, yet it is important to think through the primary drivers. By looking at the forms of inflation, it may be easier to distinguish what is transitory, and what is permanent. 

For discussion purposes, we have outlined five forms of inflation. Each will have a different impact on equities, rates, currencies, credit, and commodities. 

There is classic demand-push that will be very relevant when there is limited slack in the economy. We are in a reflation, but demand-push may not fully engage with the US economy. The output gap is closing or has closed and unemployment is falling. However, the current reflation may be coming from other causes. That said, the natural rate of unemployment is not stable. What is full employment may be subject to change. A demand-push inflation may be good for equities because increased demand will allow for price increases. It is clearly negative for rates. 

Wage inflation, which we are likely experiencing, is a dangerous form for equities since companies have to pay-up for labor. Margins will be squeezed, and revenue share will move from capital to labor.

We separate cost-push from wage inflation and classify it as the operational costs of business which may include stock-outs, transportation costs, inventory, and regulatory issues. These all cut into profit margins but will impact sectors differently.

Commodity inflation can be viewed as mainly transitory, but if shortages are a function of underinvestment, these costs can be higher for an extended period. This would be foundation of a super-cycle.

Liquidity-driven inflation is associated with excess money balances, the classic monetary inflation often expressed in monetary theory. Excess money balances will be reduced through the purchase of goods or financial assets. This inflation, in the longer-run, will debase the dollar.

Granted this is a simple framework, yet discussion of the form inflation will help serve as focus attention on portfolio decisions.