Inflation is at a 12-year high

Thought of the Week / May 21, 2021

Inflation is at a 12-year high

On Wednesday, May 12, the Bureau of Labor Statistics released numbers indicating that the Consumer Price Index for all Urban Consumers – All Items Index (CPI-U) has risen 4.2% since this time last year. This is the largest 12-month increase of inflation since 2008.

From a high level, this seems concerning, but let’s look at the breakdown:

Last year at this time the economy had just shut down and Gasoline was averaging $1.96 per gallon. Very few people were flying and traveling, which created a large shock to gasoline demand.

Year-over-year, the price of gasoline is now up 47.9%. Gasoline makes up a large portion of the Energy Sector, and the Energy Sector accounts for a large part of the recent 4.2% inflation increase. Energy sector securities have benefited from this recent increase in prices as shown in the Morningstar US Energy Sector Capped Price, which had returned 37.11% YTD as of 5/20/2021.

Fed Chairmen Jerome Powell stated in his most recent press conference that the Federal Reserve remains committed to keeping interest rates near zero for the time being, and will continue to maintain that stance until they believe the economy is fully recovered. The Fed has also acknowledged that they anticipate rising inflation in the short-term due to supply shortfalls and a reopening economy, but they believe these price increases will have only “transitory” effects on long-term inflation. In other words, they believe that once the economy has fully recovered, inflation will return to target levels.

Even with the Federal Reserve’s commitment to maintaining interest rates near zero, fears of rising rates have led to strong performance in the Financial sector. The Morningstar US Financial Services Sector Price had returned 21.59% YTD as of 5/20/2021.

In summary, changing economic conditions emphasize the importance of a well balanced portfolio. By allocating funds across a wide variety of asset classes and industry sectors, investors can stand to benefit from a variety of changing market conditions.