According to the Bureau of Labor Statistics, The US consumer price index (or CPI) rose 7.5% in January when compared with January 2021, its fastest annual pace since 1982. The CPI measures the average change in prices paid by consumers for a typical basket of goods and services, and while there is some critique on how well it measures inflation, it is often used as an inflationary indicator reflecting the general level of prices changes across the economy. Driving the increase when compared to January a year ago are used-car prices (up 40.5%), gasoline (up 40%), food prices (up 7%), and we continue to see a steady pickup in rental costs, which account for nearly one-third of the CPI.
Much of the increase is seemingly fueled by pandemic-related supply-and-demand imbalances, which economists expect to fade as the pandemic recedes and we get back to a more “normal” environment (when and how that materializes is anyone’s guess).
High inflation is usually driven by a strong economic growth, posing a challenge to the Federal Reserve as it tries to curtail rising prices without damping a rebounding economy, and market participants will be watching with keen interest in the months ahead as the Fed tries to determine the appropriate tempo and scale of rate increases entering a tightening cycle.
Investors should be prepared for markets to experience higher volatility over the short-term, however, it’s helpful for long-term investors to keep in mind that over time markets have rewarded investors across inflationary/deflationary environments, rising rate/falling rate cycles, and periods of economic growth/recessions.
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