Saturday, May 29, 2021

April Inflation

This week the Bureau of Economic Analysis reported April PCE (Personal Consumption Expenditures) excluding food and energy, the number rose 3.1%. This marks the first time this number has been over 3% since 1992. This is an economic number that the Federal Reserve watches closely as an indication of inflation at the consumer level. The Federal Reserve has communicated that as the world emerges from the pandemic, disruptions in supply chains will result in a transitory inflation spike. The Fed's position is that inflation will moderate with policy adjustments and the normalization of the economy. An indication of market participant's inflation concern is reflected in bond yields which were little changed on the news. The Federal Reserve has made it clear that its goal is to create inflation above 2% with a longer-term average of 2%. The reaction in the bond market suggests that, at least for now, market participants believe the Federal Reserve can keep inflation under control.

Currently, the Federal Reserve purchases $120B in bonds monthly, which is viewed as inflationary. Recently several Fed Presidents have suggested that recent economic data is strong enough to justify talking about a policy shift. I think the Fed will begin signaling its intent in the coming months to reduce its bond-buying program, and equity markets could have a short-term adjustment. I believe inflation fears are premature. We continue to have strong deflationary forces through the globalization of labor and manufacturing and increased productivity due to technology utilization. I would be concerned about a protracted period of rapid inflation; historically, that economic condition is corrected by a recession. As always, I will monitor the economic data and adjust accordingly.