Tick Tick… Boom?

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What's going on?

No pressure, guys: fresh data on Wednesday showed the prices of US goods and services ticking higher at their fastest rate in more than a decade last month.

What does this mean?

America’s spending big at the moment, with inflation rising by the most since 2009 in April. Between strong demand, supply bottlenecks, and the trillions the US government’s pumped into the economy, consumer prices increased 0.8% last month compared to the one before – while the “core” inflation measure (which excludes unstable food and energy costs) climbed at its fastest since 1982.

The jump was much bigger than economists expected, and well above the Federal Reserve’s (the Fed’s) target. That could spell trouble for investors: if prices rise too rapidly, the US central bank might hike interest rates sooner than expected in a bid to cool the economy down. And that could prompt investors to ditch suddenly more expensive-looking stocks.

Why should I care?

For markets: There’s some guesswork involved here.

The inflation conundrum is complicated by the “base effect”. April inflation was up 4.2% on a year ago, sure, but prices back then were depressed by the pandemic-induced economic shutdown. That artificially low base will continue to muddy the all-important annual price-rise waters next month too – and allow the Fed to argue that any pickup in inflation is only temporary.

The bigger picture: Things should settle down.

Rising inflation expectations have played a big part in the recent tech-stock selloff, but they’re not the only culprit. High demand for “put options” – which provide protection against those selloffs – has forced market makers to limit their risk by taking the other side of the bet, in turn increasing the swings in tech stocks’ prices. Still, that volatility should start to ease when about a third of the options contracts in question expire on May 21st.

Originally posted as part of the Finimize daily email.

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