To many, the word inflation reminds them of sports with a ball and a pump. For us investors, inflation can be scary as its economic meaning holds a lot of weight. Most of you probably know what it is by now, but at its simplest, inflation is a decrease in the value of a currency, which leads to prices of general goods rising. The Fed considers an inflation rate of 2 percent to be healthy, so anything higher wouldn’t be the best.
With me saying that, I’m sure you think that inflation is higher than 2 percent. If so, you guessed correctly. The current rate of inflation sits at 2.6 percent, which is measured by the CPI. The CPI statistic simply shows how prices have changed in a certain amount of time, and this is reported by the U.S Bureau of Labor Statistics. The inflation rate has gone up as stimulus is continuing to be passed, which is increasing the dollar supply. Along with this, interest rates are also low, which adds more to the fire.
Wednesday morning brings the new inflation data for April, and the expectations aren’t too promising. Analysts and economists expect inflation to rise by the highest level since a decade ago, when the United States was recovering from the Great Recession. If prices rise at an uncontrollable rate, buying power could decrease, stalling our economy from recovering as consumer spending is key to empowering the economy. This would lead to the Fed increasing interest rates, which would once again hurt the stock market. However, many don’t see it going to that extent, including the Fed. Many economists believe that inflation will peak in the summer and start to revert back to the mean after.
Now though, the stock market has been jittery in the days leading to the report. Tech has seen a vicious reversal, while the other indices have followed in its path. If inflation data turns out to be problematic, it could send the indices down the drain, possibly into correction territory. On the other hand, if inflation data meets expectations, I believe that the markets wouldn’t react much. The recent drop in the stock market could be signaling that people are pricing in the data, so the market could be realizing the effects now. Do you think that inflation will rise by a lot?
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.