Inflation in context

Inflation has been a hot topic in 2021, with surging prices for many goods such as used cars and lumber directly impacting the consumer. It is important to identify what is driving the current inflation pulse. In 2020, the economy endured a sudden stop as the pandemic caused governments to introduce severe restrictions, and large monetary and fiscal stimulus measures were implemented to stave off the risk of a depression. Demand for goods surged, but at the same time, global supply chains were compromised, and this unique combination caused prices for many goods to climb. Meanwhile, demand for services collapsed, and prices for services began to show signs of deflation.

It will take time, but these supply-demand imbalances will gradually normalize, in our opinion. In autos, where a global semiconductor shortage has spurred the imbalance, recent reports point toward its easing by the end of this year. This highlights why inflation is being described by some as transitory. If the inflation impulse were structural, we would be witnessing a sustained surge in wage income growth and business revenues.

Challenging imbalances in the US auto sector

Sources: Bloomberg.

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What this means for investors

How is it that bond yields have plunged while inflation has soared? We are likely in the peak period of visible inflation. Bond markets appear to have been more focused on where the trend will be in 6-12 months, with disappointment about the United States' fiscal strategy and concerns about the Delta variant of COVID-19 leading to questioning of the previous growth optimism. Sentiment in rates has swung from optimism to fear, with the likely outcome somewhere in between. This suggests that asset markets can remain vulnerable to bouts of volatility until the multitude of uncertainties are reduced.


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Investing involves risk, including the possible loss of principal.

Past performance does not guarantee future results.

Nothing presented should be construed as a recommendation to purchase or sell any security or follow any investment technique or strategy.

The views expressed represent the investment team’s assessment of the market environment as of June 30, 2021, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice.

Market risk is the risk that all or a majority of the securities in a certain market – like the stock market or bond market – will decline in value because of factors such as adverse political or economic conditions, future expectations, investor confidence, or heavy institutional selling.

The US Federal Reserve's industrial production (IP) index measures the real output of the manufacturing, mining, and electric and gas utilities industries; the reference period for the index is 2017.

The US Consumer Price Index (CPI) is a measure of inflation that is calculated by the US Department of Labor, representing changes in prices of all goods and services purchased for consumption by urban households.

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