The U.S. economy is growing quickly, possibly even quicker than expected, as it recovers from the COVID-19 crisis. The Gross Domestic Product (GDP) could grow as high as 8% this year which would be one of the fastest paces in over thirty years.
The fast growth this year, along with the central banks’ continued quantitative easing has caused some inflationary concerns. To date, the word “inflation” was mentioned 800% more in this quarter’s earnings reports than last quarter. This is because businesses are seeing a significant increase in prices which are cutting into earnings. The consumer price index (CPI) has risen, but it isn’t expected to stay at that high level. The Federal Reserve, according to their meeting notes, expects the higher prices we are seeing to be “transitionary”. Whether that is true or not remains to be seen, but either way, we aren’t expecting a return to the 1970’s level of inflation.
The Federal Reserve has stated it will not raise short-term interest rates until employment has returned to pre-pandemic levels or until it is sees rise in inflation as more permanent. Inflation is expected to rise around the world in the coming weeks and months because of supply chain bottlenecks. However, as the economic reopening expands to other states and countries, we should see raw materials and component shortages disappear which should shorten supplier delivery times. If this is the case then inflation is expected to fall to a level that the Fed and other central banks are comfortable with, which would keep them from premature tightening monetary policy.
Performance has been more mixed recently because of a higher-than-expected consumer price report and wholesale price inflation that stirs up investors with inflation worries. It seems everyone is keeping one eye on the inflation numbers and the other eye on how the Federal Reserve might react to it.
Have a blessed week.