The 'Inflation Illusion' Still Haunts the Economy

Cookie Monster says the dollar is losing its buying power...

Last week, the Sesame Street character's official account on X (formerly Twitter) issued the following viral posts...

By "shrinkflation," the Muppet is referring to a dreaded economic trend...

Companies "shrink" the size or weight of a product while keeping the price the same. The cost per unit is then inflated.

This boosts profits... stiffs consumers... and ultimately debases the value of currency.

Obviously, Cookie Monster isn't an economist. But his tweet carries some ominous economic subtext: Inflation still isn't under control.

Many brands are playing on this narrative today. After all, we're still seeing higher prices at the grocery store... And if you base your knowledge of the economy on spokespeople like Cookie Monster, it's easy to believe inflation is still soaring.

But the truth is, the rate of inflation has dropped in the past 18 months. It's not an immediate headwind for the economy and stock market.

As I'll explain today, the folks telling you otherwise are selling an illusion...

Cookie Monster isn't the only one who's worried about inflation. Comic-book superheroes are, too...

Ryan Reynolds plays a zany costumed antihero in Marvel's Deadpool movies. He also holds an ownership stake in budget telecom company Mint Mobile – and he's its chief spokesman, too.

The Mint Mobile team has placed ads on various podcasts and streaming platforms. So you might have heard one of Reynolds' recent ads about inflation. Here's one I heard just the other day...

At Mint Mobile, we like to do the opposite of what Big Wireless does. They charge you a lot... we charge you a little... So naturally, when they announced they'd be raising their prices due to inflation, we decided to deflate our prices due to not hating you.

This ad has been kicked around the Internet in some form since June 2022. But it's still in circulation today... stoking the same anxieties as Cookie Monster's tweet.

The media is in love with this "catastrophic inflation" narrative... But if we look at the data, that level of inflation is no longer present.

One way we can see this is by using the U.S. Personal Consumption Expenditures ("PCE") Price Index...

This is a widely followed inflation gauge in the U.S. It measures the average price paid by consumers for goods and services. And it's the Federal Reserve's preferred gauge to help it determine monetary policy.

Take a look at the inflation rate based on this index...

The Fed's ideal inflation rate is 2% year over year. Back in 2022, PCE inflation was hovering at 7.1%... But today, it's less than a percentage point above the Fed's target at 2.4% (as of January).

The peak above 7% appeared the same month Reynolds' inflation ad first hit the Internet.

Now, it's true that prices have risen fast in the past few years. And price gains are cumulative. That means Americans are still dealing with elevated prices – which is what Cookie Monster is referring to.

But higher prices are a far cry from higher inflation. Instead, inflation is the rate at which prices increase... And today, that rate is slowing dramatically.

It's a common mistake to think inflation is still soaring right now. The mainstream media is aggressively pushing this story – and when you look at your grocery-store receipt, it seems like the only explanation.

So, like a lot of folks, you might believe things are only getting worse and worse... not better.

But price growth is slowing way down. The soaring inflation we saw in 2020 and 2021 just isn't present in the economy today.

And from an investment perspective, this bearish "inflation illusion" is creating an opportunity for contrarians...

As long as the fear of "catastrophic inflation" has its hooks in the American consumer, folks will only be able to see downside that isn't there.

This is a recipe for irrational selling... But for courageous investors, it's setting up a chance to get in cheap and go long.

Good investing,

Sean Michael Cummings

Further Reading

The media was quick to judge Apple's latest product, the Vision Pro. Many folks dumped shares due to the bad press. But this sell-off means one of the world's best businesses is now on sale – and that's setting up a rare chance for contrarian investors... Read more here.

A recent rally has pushed one blue-chip stock into wildly overbought territory. Normally, this would be cause for concern. But history tells us we shouldn't worry about this world-class business. Double-digit gains are likely over the next year... Learn more here.

Market Notes



JPMorgan Chase (JPM)... financial giant
Bank of America (BAC)... financial giant
AbbVie (ABBV)... pharmaceuticals
GSK (GSK)... pharmaceuticals
Thermo Fisher Scientific (TMO)... life sciences
Abbott Laboratories (ABT)... health care giant
Boston Scientific (BSX)... medical devices
Advanced Micro Devices (AMD)... semiconductors
Qualcomm (QCOM)... semiconductors
IBM (IBM)... computers
Meta Platforms (META)... social media giant
Spotify Technology (SPOT)... audio streaming
Airbnb (ABNB)... online vacation rentals
Walmart (WMT)... "World Dominator" of discount retail
Target (TGT)... big-box retailer
Kroger (KR)... grocery stores
Colgate-Palmolive (CL)... household goods
Sherwin-Williams (SHW)... paint
General Electric (GE)... manufacturing
AutoZone (AZO)... auto parts
Enterprise Products Partners (EPD)... oil and gas


Humana (HUM)... health insurance
C.H. Robinson Worldwide (CHRW)... shipping technology
Charter Communications (CHTR)... cable TV