Early Wednesday, the futures market indicated an up day for the market. Then, the Producer Price Index was released, showing a troubling surge in inflation. In fact, it was the highest reading in 16 months, with food prices leading the surge.
To a trader, this implied that the worries about deflation were over, which means the Fed will no longer have to "prime the pump" quite so much. A less accommodative Fed means less quantitative easing and higher interest rates. With increased uncertainty, traders reduced their exposure to it by selling stocks.
To an economist, this is irrational. Remember the formula: GDP = MV, where M is the money supply and V is the velocity of money. The huge increase in M over the last few years has not driven up GDP above productivity growth because V has decreased. We will not fear inflation until V increases, which will be preceded by increases in the consumer confidence index and consumer credit outstanding. Stay focused on that and ignore the gyrations of traders.
To a trader, this implied that the worries about deflation were over, which means the Fed will no longer have to "prime the pump" quite so much. A less accommodative Fed means less quantitative easing and higher interest rates. With increased uncertainty, traders reduced their exposure to it by selling stocks.
To an economist, this is irrational. Remember the formula: GDP = MV, where M is the money supply and V is the velocity of money. The huge increase in M over the last few years has not driven up GDP above productivity growth because V has decreased. We will not fear inflation until V increases, which will be preceded by increases in the consumer confidence index and consumer credit outstanding. Stay focused on that and ignore the gyrations of traders.
