Experts say investors are preparing for the risk of higher inflation as the reopening of the U.S. economy gathers steam. However, they warn that many may not be prepared if the worst of the price increases has already run its course. While economists say that the U.S. economy is on the cusp of a full recovery, they say reaching that milestone still won’t be easy.
Fox Business/Jonathan Garber
Inflation posturing divides investors
Investors are positioning for the risk of higher inflation as the reopening of the U.S. economy gathers steam, but may not be prepared if the worst of the price increases has already run its course.
Hot inflation readings, rising expectations, and labor and materials shortages have contributed to the fastest price gains, both for consumers and producers, since the 2008 financial crisis.
“Looking through the lens of our flows and positioning indicators, we see: strong inflows into inflation-protected bond funds as well as into equity funds focused on Energy, Materials and Financials,” wrote Deutsche Bank strategists led by Parag Thatte.
The inflows into so-called inflation protection assets come as recent surveys from both Deutsche Bank and Bank of America show investors are growing increasingly worried that higher than expected inflation is the biggest risk to markets.
Data released earlier this month showed consumer prices rose 4.2% year over year in April, making for their biggest annual increase since September 2008. Prices increased 0.8% from the prior month.
Meanwhile, producer prices jumped 6.2% annually, the most since recordkeeping began in November 2010, and were up 0.6% on a monthly basis.
The Federal Reserve says the recent jump in inflation readings is “transitory” due to a “base effects” skew due to the price decline that occurred at the onset of the pandemic.
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CNN Business/Anneken Tappe
The US economy is closer than ever to ‘back to normal.’ But we’ve still got a long way to go
More than a year after the pandemic began, the US economy is on the cusp of a full recovery. But reaching that milestone still won’t be easy.
CNN Business’ Back-to-Normal Index, developed in partnership with Moody’s Analytics last year, shows the US economy is 90% of the way back to where it was before the pandemic began over a year ago.
The index, which is comprised of 37 national and seven state-level indicators, had bottomed out at around 57% in April 2020.
But despite the immense improvement, getting that last 10% back is going to be hard. The vaccination effort is ongoing and consumers are once again spending money on dining and travel — yet the nation remains millions of jobs short of pre-pandemic levels. Meanwhile many workers continue to feel hesitant about returning to in-person work, and the childcare riddle is still unsolved in many areas where schools and day cares aren’t yet operating at full capacity.
Click here to read what needs to happen to get the country 100% back to the pre-pandemic economy.
Gold steady near multi-month highs on weaker dollar
Gold steadied near its highest in more than four months on Tuesday, buoyed by a weaker dollar but with gains capped after U.S. Federal Reserve officials soothed fears about inflation.
Spot gold had risen 0.12% to $1,883.36 per ounce by 0930 GMT, not far from its highest in 4-1/2 months hit on Wednesday.
U.S. gold futures were little changed at $1,884.30.
While the macroeconomic background and the weaker dollar is still supportive for bullion, “gold is increasingly starting to show signs that it needs to just consolidate” following a strong rally since April, said Saxo Bank analyst Ole Hansen.
“Generally, the comments from the Fed members yesterday were quite soothing in terms of inflation expectations, that may just have reduced a little bit of the appeal here in the short term,” Hansen said.
Gold is considered a hedge against inflation, but higher interest rates will dull its appeal as they translate into a higher opportunity cost of holding the non-yielding asset.
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