Inflation was the wrecking ball in 2021. Will it continue in 2022?

It has a lot of people worried. It dominates headlines. You feel it in your wallet.

It’s kept the Federal Reserve and politicians on edge. We see it everywhere.

And it’s driving my big market prediction for 2022.

In this edition of Investing With Charles, research analyst Matt Clark and I discuss the inflation situation. I also tell you where I think prices are headed next — and how you can invest around it.

Check out the highlights from my conversation with Matt below:

The Current Inflation Situation

Charles: First, I want to focus on two different types of inflation.

If there’s such a thing as good inflation, it’s demand-pull inflation. That’s when we get rising prices because demand is super strong, and everybody wants to spend money. That’s the sign of a healthy economy.

The other is cost-push inflation. That’s where you get rising prices, not because of higher demand, but because of supply shocks that screw up the economy and cause things to be more expensive.

Right now, we have both.

We have demand-pull inflation because people snapped their wallets shut during the pandemic. Partly because they were stuck in their house, and also because they were scared and didn’t want to spend money.

All of that has dissipated, and you have people free spending again. They’re catching up, spending not just the money they would spend today, but the money they didn’t get to spend last year.

The icing on the cake was the Fed’s monetary policy, because the Fed kept interest rates at zero. That encouraged a lot of buying and borrowing. It also inserted a lot of new liquidity into the market, which manifests itself in higher prices, higher asset prices in the stock market, et cetera.

On the supply side, we’ve talked about it in Green Zone Fortunes, we’ve written about it in Money & Markets

The supply chain is a total wreck right now.

Factories in Asia were closed for stretches, and we’re still feeling the effects of that now. Ships got diverted during the pandemic. Instead of sending PlayStations, now they’re sending medical masks from Vietnam to Argentina. (That’s a made-up example.) All the boats are in the wrong places right now, and everything is out of whack.

It’s pushing prices up along the entire supply chain.

So, demand-pull and cost-push all tie together to create the nastiest inflation we’ve had in decades.

My 2022 Market Prediction for Inflation

My big prediction for 2022 is that, toward the second half of the year, inflation is not going to be an issue anymore.

In fact, we’ll be wishing we had inflation. I think deflation is more likely, or at least very severe disinflation (where the pace of price inflation slows for a period of time).

Why? Well, let’s pick apart the pieces here.

Demand Side

Higher-than-usual demand is going to naturally dissipate over time.

On top of that, the Fed is already pulling back its stimulus. It’s no longer injecting $120 billion every month into the bond market. It’s already scaled back to $80 billion, and that will continue. It isn’t raising interest rates yet, but it will.

All of these demand forces are draining out of the system, little by little.

Editor’s Note: After Charles and Matt recorded their video, Fed Chair Jerome Powell announced the central bank is set to dial back its bond buying at a rapid pace in 2022. Powell also forecasted three interest rate hikes next year during the Fed’s monthly meeting in December.

Supply Side

Do you think the biggest money makers and the captains of industry are going to allow the supply chain to remain broken forever?

There’s too much money to make fixing it. Jeff Bezos is not going to permit Amazon’s one-day delivery to become two-day delivery. There’s no way.

The supply chain is going to get fixed because there’s too much at stake for it not to.

The greatest minds and the biggest pots of money in the history of capitalism are already at work fixing that. But it’s a process.

All of these factors that created the inflation we’re suffering from today, they’re already in the process of dissipating. It’s not going to show up in the numbers today. There is a lag. But it’s going to show up in the numbers sooner rather than later.

So, that’s my big call for 2022. Inflation will turn into deflation, or if you want to be technical, at least severe disinflation.

Matt: if you look at the Consumer Price Index from 2020 to 2021, we see a massive jump. This index tracks the price of everything we spend money on.

CPI 2020 2021 inflation

The low was about 256 in April of 2020, which is right as the COVID-19 pandemic was hammering. Since then, into November 2021, the CPI jumped more than 8%. That‘s a massive jump.

So that’s going to reverse course, and it’s going to trend downward, maybe towards the second half of 2022. Is that how I understand your prediction?

Charles: Yeah, that’s it.

How Investors Should React

Certain investments do really well during times of inflation. Others do well during times of deflation.

The ones that tend to do well during deflation are fixed-income bonds and assets like dividend-paying stocks. Assets like gold, commodities and, more recently, cryptocurrencies do well in times of inflation.

Then there’s things like real estate that can do well during either situation.

The big trades of the last year or so have been more inflation-focused.

Next year, I think it’s going to be more of a deflation trade. Fixed income bonds, conservative stocks and dividend bank stocks should all do well.

Click here for the rest of my conversation with Matt in this week’s Investing With Charles. We talk about how today’s market looks a lot like what Alan Greenspan was dealing with in the 1990s and the chances of another market crash.

More Money & Markets Predictions for 2022

The Money & Markets team has more bold predictions and insights into what’s on the horizon in 2022:

Where to Find Us

Coming up this week, Matt will have more on The Bull & The Bear podcast, so stay tuned.

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To safe profits,

Charles Sizemore_Sig

Charles Sizemore

Co-Editor, Green Zone Fortunes

Charles Sizemore is the co-editor of Green Zone Fortunes and specializes in income and retirement topics. He is also a frequent guest on CNBC, Bloomberg and Fox Business.