DE | Sinai Economic and Market Perspectives | Inflation and Interest Rate Angst and Rebalancing – 05/13/21

Posted May 17, 2021 by Diane Buscemi

Inflation and Interest Rate Angst and Rebalancing
Allen Sinai and Rohan Kumar

Inflation and Interest Rate Angst
Inflation, in the latest data and anecdotally, and as a consequence of a “Boomlet” for the U.S. Economy as it exits the Pandemic, has moved sharply higher, raising the question of whether it is getting out-of-hand and will force the Federal Reserve to raise interest rates sooner than currently planned. Higher interest rates can lower equity valuations and potentially weaken the economy, so stocks are at risk on the interest rate effect from inflation, although at the same time helped by the “Boomlet.”

Incredibly strong economic growth so far this year and a huge snap up for the economy are putting strains on supplies and bringing higher prices, especially for sensitive commodities as a result of shortages in supplies, lengthening delivery times, and some rising production costs. Inability to find workers fast enough to satisfy the surge up in jobs openings, along with super-strong growth in demands post-Pandemic, is a wage cost-price risk. These factors are spiking up price inflation more typically seen much later in a business expansion, MoM in the PPI, CPI and Consumption Price Deflator, particularly when arrayed against a year ago when the Collapse of the economy pushed prices into negative territory for a time.

Higher inflation typically occurs in a cyclical Recovery and then the much longer Expansion phase and demand-based, with inflation rising more-or-less depending also on supply-side responses. The early signs of an inflationary process get reflected in rising interest rates and eventually less “Easy” Monetary Policy which, in turn, raises short- and long-term interest rates.

During such periods, Consolidations and Corrections occur in an ongoing Equity Bull Market, the latter based on the economic expansion and rising earnings, which, if demand-side in origin, as it is this Expansion, company earnings keep on rising and an Equity Bull Market continues.

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