Kevin Quinn: For investors, inflation likely to be less of a problem in a year’s time

For a rebound in riskier assets later in 2023 to be enduring, we will need inflation to be truly exiting the system as we head into 2024

Despite strong statements to the contrary from central bankers, the market opinion is that inflation in the US will reach about 2.4% by the end of 2023, and will be stuck there for some years.

The past year was one to forget for most investors: Equity markets and, in particular, bond markets endured heavy losses as the combined impact of war in Ukraine, inflation, rising interest rates, and the tail end of the Covid crisis took their toll. Indeed, were it not for the strength in the dollar during the year, many investors would have felt a much deeper impact in their pockets. 

The year also featured no fewer than three bear market rallies, each of which flattered to deceive. In mid-March, mid-June and mid-October, the stock market bounced in response to improving news about inflation, each time creating an expectation that central banks would ease up on rate increases.