Is Inflation surge of 4.2% expected to continue?
- The Consumer Price Index rose by 4.2%, the fastest rise since 2008.
- Fed views inflation as transitory.
- Cyclical sectors perform well in periods of high inflation and strong GDP growth.
Inflation, as measured by consumer price index (CPI), increased by 4.2% from a year ago, the largest 12-month increase since September 2008. The markets saw a broad sell-off on Tuesday in expectations of higher inflation with Dow Jones Industrial Average down 1.36%, S&P 500 down 0.9% and Nasdaq Composite Index down 0.09%.
The markets have been trending down today morning as well after the release of the inflation data.
Is inflation here to stay?
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Jonathan Golub, Chief US Equity Strategist at Credit Suisse said to CNBC:
Everyone who is involved in markets knows that the inflation data is running hot … The debate right now: Is this temporary or is this something stickier? And we won’t know for a long time, but that’s really where the conversation is going.
He further said that second-quarter GDP is going to be “extraordinarily strong” with expectations of a 12% year-over-over GDP growth and 57% earnings growth. Such strong growth comes at a cost, which is inflation. The question remains is it temporary or going to continue.
The Federal Reserve continues to acknowledge that inflation is accelerating but views it as transitory. At the time of the release of the last Federal Open Market Committee meeting minutes, Fed Chairman Jerome Powell said the recovery is “uneven and far from complete.” and these “one-time increases in prices are likely to only have transitory effects on inflation.”
Where can investors find shelter in case inflation continues
Jonathan Golub sees the current surge in inflation as “a little bit of a hiccup” and expects that the markets will be able to handle it perfectly fine. In such a market environment, he said the investors should look to lean into cyclical stocks.
Cyclical sectors such as materials and industrials as they are the sectors most exposed to inflation and strong GDP growth. Material and industrials have been some of the strongest performing sectors in the last month.
While S&P 500 has been relatively flat for the trailing one-month period, the Vanguard Materials Index Fund ETF (VAW), that tracks the performance of the stocks in the materials sector is up nearly 8.5% and Energy Select Sector SPDR Fun (XLE), that tracks the performance of the stocks in the energy sector, is up nearly 13% over the same time period.