After an ugly close to 2018, the financial markets have leapt off to a strong start in the new year with the S&P 500 up almost 7% year-to-date. While many of the economic issues that lagged the market are still unresolved, the bulls are running on Wall Street again.
It’s amazing that in just 20 days, the market has gained back all of last year’s losses. The Fed is signaling they won’t be as aggressive with interest rates and there is hope for a quick trade deal with China. Other issues, like the government shutdown, are taking a sudden back seat.
What has really caught my eye recently is this chart I snapped from the Wall Street Journal last week. I couldn’t find it online, so I’m including this somewhat fuzzy picture I took on a plane. It shows how much inflation fears have subsided in just a few months …
Last year, like a lot of folks, I started worrying that we were heading into a more inflationary time. I wrote THIS POST about it before the midterm elections. I even went back and looked at our early retirement assumptions for retirement.
I use a 2.5% annual inflation assumption, so we were still in a ‘safe’ place on that variable, but I worried because retirement assumptions are incredibly sensitive to changes in the inflation rate. If inflation stays a half a percent below our target we are golden. That said, if inflation moves a half a percent above our target (to 3%), it will be painful if investments don’t keep up.
Fortunately this WSJ forecast for inflation over the next ten years has moved back below 2%. I imagine it will start moving back up at some point, especially given that oil prices (which are a highly volatile component of CPI) are in the doldrums right now, but likely to recover before too long.
What inflation assumptions have you used in your FIRE model?
Image Credit: Chart from WSJ, 4 Jan 2019; Pixabay