Inflation falls more than expected.

Those who have been following the financial media these days will have been convinced that inflation has now reached unsustainable peaks. After all, September's consumer price index broke in with glowing numbers, showing a 5.4% increase year-over-year and 0.4% increase month-over-month, both above expectations.

News outlets slammed this data to the front page, publishing a plethora of articles about how inflation in the U.S. economy is hotter than ever.

However, you may have noticed that even after this news, the markets reacted the opposite of what might have been expected.

In fact, the stock market rallied:

Commodity stocks plummeted:

Along with US government bond yields:

What is this inconsistency due to?

No, it is not due to the fact that the markets had already "priced in" a rise in inflation, the intraday response was too decisive to be just that. The truth is that analysts and fund managers for once sifted through the numbers better than the media did, going to the data that really mattered.

While the media hastily read the charts, dwelling on the first figure that appeared in front of them, i.e. the simple CPI (i.e. the raw consumer price figure), the analysts went down a few lines and looked at the core CPI, or core inflation minus food and energy.

And here the numbers tell an entirely different story...

In fact, this index only increased by 0.2%, which is much less than expected. This means that in September, at least in the U.S., prices of used cars, clothing, transportation services and medical services decreased compared to August (source: U.S. BUREAU OF LABOR STATISTICS).

These are completely different numbers than in April, May, and June, when the U.S. core CPI increased from 0.7% to 0.9% each month, from July to September the monthly increase in CPI went back to being around 0.2% per month, which is what it was before the pandemic back in 2019.

This is a very accurate signal on one of the issues that analysts were most concerned about, namely the blockage of supply chains. There is now no doubt that these are gradually being restored. The data don't lie.

And that is wonderful news for the markets! It's also why tech stocks are regaining their strength.

During yesterday's trading on Wall Street, tech stocks and generally high-growth stocks returned to rally mode, while cyclical and value stocks, which are less sensitive to rates, stalled. I suspect this trend will persist and lead us to the long-awaited year-end rally.

After all, Covid-19 cases globally are declining and government restrictions are loosening, and if these trends persist into 2022, supply chain disruptions will be just a memory.

**Inflationary dynamics will not subside all in one day.

Gradually, production lines in China will reach 100% capacity in 2022. Supply shortages will ease. Global supply and demand dynamics will rebalance and inflation will fall, but markets prefer to price events well before they happen, so they'll make tech stocks soar much sooner.

Today, technology is the single most disruptive force - the biggest wealth-creating force - in the history of financial markets, **many people forgot about it in 2021!

I firmly believe that over the next 12-24 months, tech stocks will rise like they haven't since the dot-com boom.

Thanks for reading.

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