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MarketWatch MarketPulseSep 30, 2022
Market Extra: ‘Painfully slow capitulation': Why investors keep getting inflation wrong
Getty Images/iStockphotoA brutal third quarter in financial markets is about to come to a close and one thing is overwhelmingly clear: Inflation is the single most important factor driving financial markets right now and yet few, if any, people seem able to get it right.The reason? Professional forecasters, policy makers and traders all keep dismissing the way inflation behaved in the 1970s, according to BofA Securities global economist Ethan Harris. That's when inflation — fueled by the war in Vietnam of the previous decade — proved to be unrelenting, forcing three different Fed chairmen to push interest rates above 10% until the fever of rampant price gains finally broke in the 1980s.Read:Investors may be in for a rude surprise: History shows inflation can take years to return to normal even when the Fed hikes interest rates above 10%Friday's data releases only underscored the resiliency of inflation: U.S. stocks wavered on a hotter-than-expected reading within the personal-consumption expenditures price index for August, just as the eurozone reported a record 10% annual inflation rate this month that was driven by an energy crunch. Meanwhile, economists, policy makers and traders are all factoring in a path for U.S. inflation that falls toward or below 3% in 2023.The ramifications of underestimating inflation's persistency are huge for financial markets, creating the potential to add further losses on top of the trillions of dollars of destruction in U.S. wealth that has already occurred in 2022. It's been the worst September for U.S. stocks since 2008 through Thursday's close, and financial markets are on track for their worst year in at least a half-century. The ordinarily safe world of global bonds fell into its first bear market in 76 years this month, as traders and investors brace for a period of continued rate hikes by central banks. And the dollar — the undisputed winner of 2022's extreme volatility — is at 20-year highs, leading to speculation about w
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