In March 2021, we published an article Is Inflation set to rise? about the risks of a shift from a deflationary to inflationary model, in light of the Covid-19 recession, and the impact for investors. Three months later, the main question on investors’ minds remains if and when inflation will take off.
As America’s economy bounces back from the pandemic, stimulated by trillions of dollars of fiscal stimulus, the risk of a price surge is even more acute than before.
In the US, the core personal consumption expenditure index, which excludes volatile food and energy costs, rose by 3.1% in April 2021 compared to April 2020. The surge represents a sharp increase compared with the 1.9% annual rise in March and was higher than the general consensus. The comparative level of April 2020 is certainly low due to the first coronavirus lockdowns, but since the re-opening of the economy, we have observed a rise in demand coupled with supply chain bottlenecks that are definitely putting pressure on price. Prices are rising in all many major economies, not only in the US.
Commodity prices are rising all across the board, from corn to copper and house prices have recently accelerated, probably due to the imbalance between demand and offer, but also as a result of speculative excess creeping into housing.
The unprecedented monetary expansion (see graph below) and fiscal support is first flowing into the financial market and may explode into inflation. Concern over excess US demand contributes to the jittery of the equity market. The gap between returns for stocks and fixed income investments continues to push investors towards riskier outlets in the equity markets.
Total money supply in the USThe supply of money in the US has doubled since the beginning of the pandemic.