After the stupendous Wall Street rally in October and a solid start to November, it seems the party on the bourses has come to a halt. Investors have started worrying about the hot inflation data releases amid the Fed’s stance of calling inflation levels ‘transitory’.
According to the Federal Reserve, a major part of the inflation has been triggered by the pandemic-driven supply-demand imbalance, which might get resolved in a few months (per a CNBC article). The rising inflation levels are impacting different sectors like food, energy, shelter and cars. In this regard, Delos Capital Advisors chief investment strategist Andrew Smith has commented that “This isn’t just now focused on used car sales, apparel. You’re seeing a broadening across the entire base,” per a CNBC article. He has also mentioned that “All of this is manifesting to an inflationary point that’s showing that it’s not as transitory as they were making it out to be,” according to the same article.
Per the latest Labor Department report, the Consumer Price Index (CPI) in October rose 6.2% year over year compared to the Dow Jones estimate of a 5.9% rise, per a CNBC article. The metric came in at the highest level since December 1990 and covers a basket of products ranging from gasoline and health care to groceries and rents. It also increased 0.9% for the month, surpassing the 0.6% Dow Jones estimate. The soaring food, used vehicles and energy prices might be primarily responsible for the higher inflation levels.
Excluding food and energy prices, the core CPI was up 0.6%, worse than the estimate of 0.4%. Annual core inflation also increased at a 4.6% pace, in comparison with the 4% expectation and came in at the highest level since August 1991 (per a CNBC article).
The International Monetary Fund had earlier asked the Federal Reserves and its peers across the globe to prepare for a backup plan if the inflation levels remain persistently high, per a CNBC article. Thus, investors are now getting mentally prepared for the interest rate hikes to happen sooner than expected or the Fed’s move to taper the bond purchases.
Notably, the hot inflation data has compelled investors to look for alternative investment options that may fare better than cash or bonds in an inflationary environment. Moreover, certain companies with compromised pricing power may take a severe hit amid inflation and future earnings may also look less attractive amid high inflation levels. Following the release of inflation data, the SPDR Gold Shares fund was up 0.8% on Nov 10.