The Big Bang Theory: Inflating the Stock Market

April 21st Weekly Market Update

The Big Bang Theory, the most watched television comedy, is about a group of physicists and their aspiring actress friend from across the hall. The show often refers to theoretical physicist Sheldon Cooper’s quest for a Nobel Prize in physics as he frequently derides the work of his experimental physicist roommate, Leonard Hofstadter, and puzzles his neighbor, Penny. Life imitates art: recent data suggests MIT theoretical physicist Alan Guth (think Sheldon) is likely to be awarded the Nobel Prize for his inflation theory of the origin of the universe now that an experiment by astrophysicist John Kovac (think Leonard) found evidence of the origin of the big bang in a ripple pattern of rapid acceleration outward in polarized cosmic radiation (think Penny giving a confused look).

It does not take a Ph.D. to see that we may be witnessing a big bang in inflation. The popular theory that accelerating price inflation in the U.S. would eventually be detected has gone many years with little evidence. However, signs that inflation has probably bottomed are now showing up everywhere.

-The Consumer Price Index, the most commonly cited and used measure of inflation, averaged 1.4% over the past year, but rebounded from 1.1% in February to 1.5% in March.

-The Producer Price Index, a measure of what companies are paying for inputs, increased 0.5% in March and was up even more excluding food and energy (0.6%), accelerating 1.5% year over year.

-A number of the companies that have reported first quarter earnings discussed improving pricing for their products and services. In fact, the co-CEO of a fast food chain said during the company’s earnings call, “We believe we’ve got a lot of pricing power. We feel very comfortable that if we raise prices somewhere in that mid-single digit range, we still got room.”

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