Inflation or not?

Tax day happened Monday, May 17th officially marking the close to the calendar year 2020. What a year!

Inflation or not inflation. Try buying a used car and notice that the shortage of supply and steady demand combined are pushing prices to record levels. Look at rental car prices and you will see a similar trend. It is possible to find both sides of this story in the same issue of the same newspaper on the same day, especially in the financial area. Of some facts, there is no doubt. I recently heard a news report that vacationing families in Hawaii were resorting to renting U-Hauls to get around the island, imagine that! 

Fiscal stimulus through helicopter money, most recently the American Rescue Plan, has put substantial cash in the hands of Americans. And they spent it pushing the consumer price index higher year over year by 4.6% in the last quarter. This exceeded expectations. The consensus reaction by the Federal Reserve is that inflation increases are expected and transitory. Even before these CPI numbers, interest rates have been heading higher steadily, at least intermediate and long-term rates, since the beginning of 2021. Notably, though, short-term interest rates have remained very very low. Also, mortgage rates have remained very low as have interest rates on savings accounts.

Monetary policy on the part of the Federal Reserve has remained very accommodative with the Fed continuing its massive bond purchases promising to keep rates low through 2022-23 or until the economy recovers. One measure of economic recovery is the unemployment rate. The latest report on new job creation fell far below expectations causing concern about the recovery. Three areas emerged as explanations for this shortfall [note: one month is not a trend] are the anxiety of workers around Covid-19, the shortage and/or cost of child care preventing women from returning to work, and the disincentive that higher than normal unemployment benefits offer for not returning to work. Also, one report is not a trend and job creation in 2021 has increased significantly.

Cryptocurrency value declined significantly today demonstrating its continued volatility. Declines, as well as advances, can reach 50% on any given day. Today the platforms that trade crypto experienced some functional problems with account owners having trouble trading. There are many reasons for the volatility, not the least of which it is hard to buy any product or service using crypto. It is a buy and hold forever world reducing the liquidity and feeding the volatility. Right now, it is hard to see where it fits in an asset allocation. 

Also, this week the Federal Reserve commented that some of its quantitative easing (remember that term) such as massive bond-buying, might be reduced going forward. This seemed to be another cause pointed to after the fact for market declines this week. There is no question that the Feds guarantee for low-interest rates is a prime mover for stock market valuations. Beware!

 

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