Last week’s Consumer Price Index (CPI) report raised the market’s concerns about increasing inflationary pressures. During the month of April, prices increased by 0.8% versus an expectation of 0.2%, bringing the year-over-year inflation rate to 4.2%. The increase sparked a fierce debate about whether or not this is a short-term phenomenon or the start of a new trend. The inflation conversation is very intertwined with the amount of fiscal stimulus and monetary accommodation that has been pumped into the economy since the beginning of the pandemic.
Markets will be watching fiscal and monetary policy closely over the next few months as the economy continues to move away from the restrictions that accompanied the pandemic. My expectation is for volatility to pick up due to the push and pull of economic data and news from Washington over the next few months. Watch the bond market for any signal that the risk of inflation in the long term has materially increased. I expect 2% on the 10-year Treasury to be strong resistance, but a move above could be a worrisome signal for equity markets.
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