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.

The reopening of the global economy, following the COVID-19 lockdown measures, leads to increased consumer spending, boosted even more with government stimulus. Businesses are having trouble keeping up with supply, leading to disruptions in production. This combination of increased demand and supply shortages causes prices to increase, ranging from the prices of basic materials all the way up through the production chain to the finished goods at the stores. 

Although the Federal Reserve claimed as recently as a few months ago that it would not raise the interest rate until the end of 2023, it is becoming increasingly likely that they may raise it already this year, if not in the coming months already. An interest rate increase would be warranted if year-over-year inflation stays above the targeted 2% rate for an extended period of time and we're currently well above that target level. And while the heightened inflation may only last a few months until economic activity returns to a normal level, it will probably take much longer for year-over-year inflation to settle down to around 2% again, especially considering April alone accounted for nearly half of the annual target. 

Let's put this into perspective: the current year-over-year core inflation of 3,0% is at the highest level since 1996. However in 1996 the interest rate was still between 5% and 6%. Right now the interest rate is at 0,25%. This means that keeping money at the bank effectively reduces its value because prices grow much faster than the interest people receive on their savings. Keeping the interest rate at this low level is simply not sustainable – raising it is in my view not only the right thing to do, it just MUST be done to prevent inflation from spinning out of control. 

Although the markets responded with a small correction when the inflation numbers were released, they managed to hold up in April for the most part, primarily because the heightened inflation was largely anticipated, but also because the economy itself continues to recover with encouraging employment and GDP numbers. The Dow Jones gained 1,93% and the S&P500 0,55%. The tech-heavy Nasdaq lost 1,53% as investors unloaded the highly valued technology sector in anticipation of higher interest rates. The dollar however lost 1,93% against the Euro, so overall US markets were negative in Euros. 

European indices outperformed US stocks with the Eurostoxx 50 gaining 1,63%, the German DAX 1,88% and the French CAC40 2,83%. The Slovenian SBITOP once again outperformed in May, adding an impressive 6,97% in May after adding 7,49% in April. The British FTSE index increased by 0,76% with the Pound Sterling adding 1,12% against the Euro at 0,8600. The Japanese Nikkei index gained a modest 0,16% Hang Seng Index gained 1,49%. 

The big winners were the commodities once with WTI Cushing oil climbing 5,32% to 66,96 dollars per barrel and gold and silver also gaining by 8,06% and 8,96% respectively. Gold reclaimed its 1900 USD per ounce level, closing May at 1911,15 USD.

Rudy Marchant
Fund manager Primorski skladi d.o.o. Koper

Monthly reports - May 2021