Inflation Returns
A sudden uptick in the consumer price index has stoked the fears of inflation in the American economy. The CPI jumped to 4.25% in April up from 2.6% the previous month - attaining an all-time high since 2008. Combine that with the weak jobs data that came out a week ago and you have the recipe for disaster. As much as it is an opportunity for the Republicans to lash out at Biden’s economic policy, these numbers are quite depressing for the stock indices. The S&P 500 recorded its worst slump since February and investors took it all out on tech stocks.
Demand >> Supply
As the US economy is re-opening, demand is re-surfacing to its pre-pandemic levels. However, supply doesn’t usually adjust that quick - producers like to wait and see how things unfold. They gradually ramp up production after carefully assessing how much the economy is demanding. Uber doesn’t have the same number of drivers it used to, restaurants are not operating at the kind of capacity they used to (or maybe serving the same luxurious meals they used to) - businesses have become accustomed to the pandemic-fit way of life and you can’t just turn it off like that. There are bottlenecks in the supply chain that will take time to smoothen out. On top of that, businesses are finding it hard to hire workers - the unemployment benefits have totally raised the bar. And in order to pay a higher wage to workers, you’ve got to charge higher prices from customers (unless your utility function is altruistic).
Transitory, Not Permanent
So let’s see what we’ve got so far - supply chain disruptions coupled with high unemployment (thanks to the stimulus checks) and supply unable to keep pace with demand. Hence, the inflation. The Fed believes that all these factors causing inflation are ‘transitory’ and so, it would be safe to expect inflation to return to the 2% level by the end of the year. That’s a convincing argument - unless you start factoring in that unemployment benefits might actually be working to permanently raise the overall wages to a new-high. Either way, the Fed has its task cut out - to keep the perils of inflation in check, it would have to raise the interest rates. And the market’s jittery reaction will make sure the tapering happens sooner rather than later.