In this week’s Market Pulse, Chief investment Officer Bernard Swords focuses on the surprise US CPI figure last week and its impact on inflation expectations and investment strategy.
- Inflation is the main talking point at the moment with the surprise in the US CPI figure. We are lapping the weakest point for prices in 2020 so, as we have been saying all along, there was always going to be a spike in inflation figures. We believe it will be transient and that inflation will fall back as demand growth normalises and the structural forces come back to play. We are still in that camp.
- The discussion about whether the spike in inflation is transient or not will continue and we will be monitoring the data but it is reassuring that most of the inflation is coming from the reopening categories and some quirky developments It has been a strange recession and recovery and continues to be so. Of the 0.9% increase mom 0.38% came from 2nd hand car and truck prices because supply of new vehicles is limited due the semi-conductor shortage. Lodging and transport added another 0.2% reflecting the opening in air travel and hotel industries.
- The inflation releases do not change our investment strategy. We have been positioned for an economic recovery that would entail higher inflation. Equites provide us with a form of inflation hedge. Higher inflation generally means higher sales growth so equity markets can handle some rise in bond yields due to the rising inflation.