Cue the next crisis… inflation!

Why are things suddenly more expensive? From residential homes and the lumber to build them, to cars, gas, and groceries. Is it truly inflation; is it here to stay?
There always seems to be a “crisis” in the stock market which the media makes a point to call “the” crisis. When the crisis fails to incinerate the market, we move right on to the next one. The past 16 months alone have served up enough tumult for a lifetime: the COVID-19 pandemic, an unimaginable social lockdown, the tense 2020 election, and the controversial and confounding Reddit/Robinhood/GameStop/AMC fiasco.
As vaccines continue to roll out and mandates become more relaxed, people are spending again, and we see the economy roaring back. The market has had one of the most violent selloffs and (thankfully), one of the quickest comebacks in history. Cue the next crisis… inflation!
Inflation… that long, slow, grinding down of purchasing power, where that first 5 cent can of Coca Cola, now costs you $1.20. The market seems to think we may be in the trend of higher inflation. And rightfully so, given record fiscal stimulus, ultra-easy Federal Reserve (Fed) accommodation, and ongoing bottlenecks in the supply chain.
In April, inflation exceeded the Fed’s target, however, it is important to note this was not a result of a labor demand-driven inflation cycle. But rather, it was due to the reopening of the economy and the obvious supply chain bottlenecks. The supply chain issues inevitably work themselves out, economic growth eventually moves back in line towards its long-term trend, and this too shall pass.
If history is any guide, sharp increases in prices for raw industrial materials (i.e., copper, zinc, cotton, rubber, etc.), generally do not have much impact on the Consumer Price Index (CPI)- the most widely used gauge of long-term inflation.
Therefore, based on the data currently available, a closer look suggests this spike in prices is a one-time adjustment as the economy reopens. While there will be continued inflation volatility, we believe, as do many analysts and economists, this should subside by the end of next year… and then, on to the next “crisis.”
Written by: Daniel M. Song, CFA®, Westfield Financial Planning