Rising CPI indices fail to perturb the Fed and investors

There is a massive divergence between Main Street and Wall Street when inflation is taken into consideration.

Last Monday, the US government announced that consumer prices, excluding food and energy, climbed at the fastest rate since 1992 in May. Sherwin Williams is raising the price of paint, one of several corporations reacting to rising commodity prices.

Food prices are also on the rise. Chipotle and Campbell Soup just boosted their pricing.

Moreover, at a recent earnings conference with investors, the chief financial officer of restaurant and arcade operator Dave & Buster'sstated that he expected a 6% to 8% increase in food expenses in 2021 owing to rising chicken, beef, and dairy prices, CNN reported.

Wages are growing as well, particularly for those returning to work in the retail, leisure, and hospitality industries as the economy recover. This contributes to inflationary pressures since some businesses will opt to raise prices to retain earnings.

Nonetheless, investors — and the Federal Reserve — dismiss increasing inflation as "transitory." Long-term bond rates are decreasing, which is unusual while inflation is high. Bond investors would demand higher returns if they felt that price increases were going to stay.

And the market is pricing in only a 3% likelihood of a Fed rate rise by the end of the year. This is down from a 10% chance of higher rates only a month ago. Investors understand that raising interest rates is the central bank's strongest tool for combating rising inflation, and they'll want to hear more about it when Fed Chair Jerome Powell addresses at a news conference on Wednesday, the report stated.

The issue is that the Fed may be waiting too long to respond to inflation.

If the Fed and bond market are incorrect on inflation, the central bank may have to reduce its massive stimulus far faster than it – and investors – would prefer. This would imply that it will unwind its large asset purchases and raise rates sooner rather than later.

Oh, do not believe this will be the case. Many others concur. They suggest that investors should bear in mind how quickly the economy has recovered, CNN stated.

As a result, it should come as no surprise that there are disruptions in the employment market and supply chain. It will take some time for things to return to what they were in late 2019 and early 2020 before Covid-19.

Even if it is true, the fact that investors and consumers are so concerned with pricing is notable. For more than a decade, inflation has been non-existent.

"The Fed has to take the inflation concerns seriously," Troy Gayeski, co-chief investment officer and senior portfolio manager at SkyBridge Capital told CNN. He added that he thinks there is a 20% chance that inflation pressures turn out to be more persistent as opposed to transitory.

"The risk of meaningful inflation has been non-existent since 2008. Until now," Gayeski said.

While Fed officials have repeatedly stated that the increase is primarily due to temporary factors (used car prices alone account for the majority of the increase), some financial institutions, as well as Republicans opposed to President Joe Biden's spending plans, have begun to raise concerns.

Source: CNN

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