Now that a sharp increase of inflation has become a reality, the next question is whether it is only a temporary spike or if this high inflation will sustain itself for a longer period of time and will affect economic growth. Is it the result of the economy reopening, increased demand and temporary supply shortages? Or could it transform into long-term inflation?
The long anticipated jump in inflation has become a reality. On May 12 the US Bureau of Labor Statistics announced that core inflation jumped by 0,9% in April, well above the anticipated 0,3% and the biggest monthly increase in nearly 40 years. Year over year, core inflation nearly doubled from 1,6% to 3,0%, also well above the anticipated 2,3% and at the highest level in 25 years. Core inflation excludes food and energy because their prices are much more volatile. A similar picture is developing around the world with the year-over-year consumer price index in the Eurozone growing from -0,3% in December 2020 to 1,6% in April and 2,0% in May.
April started with President Joe Biden's proposed 2,25 Trillion dollar infrastructure plan, described as »the single largest investment in American jobs since World War II«. Then plan that includes transport, drinking-water, broadband, manufacturing and construction infrastructure developments. These positives have boosted market confidence. However, as would be expected, Republicans are fully opposed to the plan and, as was the case with the previous $1,9 trillion pandemic relief plan, Biden may have to rely on complete Democratic support in the Senate to push it through. However, with the infrastructure Plan also including a raise of corporate taxes from 21% to 28%, even some democrats have voiced opposition of the current proposal.
March was a month with overall solid gains in Europe and the United States. Yields on 10-year Treasure notes stabilized after strong gains since November last year, somewhat easing concerns on potential interest rate hikes. Rising bond yields have kept markets on edge so far this year on concerns that an economic recovery from COVID-19, combined with fiscal stimulus, could cause a spike in inflation from catch-up consumer demand when lockdowns end.
February was a bit of a rollercoaster with main stock indices booking solid gains early on in the month but then gradually selling off again during the second half. Nonetheless markets overall gained in February, erasing the small correction in late January and turning positive year to date.