Well, hello there everyone; I hope you have all had a thoroughly enjoyable and refreshing weekend. What better way to kick off the new working week with the latest edition of News, Views and Truths?
Regular subscribers to this most august of publications will understand our view on inflation. Since the second half of 2020, we have positioned our investment portfolios with rapidly increasing inflation numbers as a base case; altering both our equity and fixed income content to protect against this most insidious destroyer of wealth.
There have been many indicators that inflation is on the rise, due, notably to the expected reopening of the global economy combined with historically high fiscal and monetary support. However, the reported inflation benchmark figures have not been reflecting this.
Last week, UIS Consumer Price Indices (CPI) jumped 4.2% in the year-on-year to April, up from 2.6% in the previous month, marking the biggest increase in inflation since September 2008. A Dow Jones survey had expected a 3.6% increase and, as such, this significantly higher than expected reading spooked the market.
Core CPI, which excludes more volatile food and energy prices, increased even more on a relative basis and, as such, has stimulated much greater concern. Increasing to 3% over the past 12 months, many commentators are pointing to this number as evidence that inflation continues to have a lot further to run. This monthly gain in core CPI was the largest since 1981.
Energy prices overall jumped 25% from a year earlier, including a 49.6% increase for gasoline and 37.3% for fuel oil. Used car and truck prices, which are seen as a key inflation indicator, surged 21%, including a 10% increase in April alone.
All eyes now move to the US Federal Reserve and their reaction to these huge price jumps. Last month, Chairman Jerome Powell reiterated that the central bank was still “a long way” from withdrawing any monetary support to the economy. Furthermore, he and other committee members have made it abundantly clear that the central bank would continue to allow inflation to temporarily run above their long-term target of 2%.
However, this inflation leap will spur on a demand for discussions, centred upon a tapering of monetary support. Although the members of the US Federal Reserve committee have moved in lock-step during the pandemic, this topic of tapering may well cause a split. And, once there is evidence of a desire by some to turn off the monetary tap, volatility will increase as the market anticipates a cessation of quantitative easing.
Historically, whenever tapering has been spotted, a market tantrum has occurred. And none of us like a tantrum.