Rising inflation, reflects pent-up demand in US economy

Thursday, May 13, 2021

Inflation concerns have been hitting the US stock market hard this week, AP reports.

The S&P 500, Nasdaq and Dow are on track for their biggest weekly loss since October 30. The Dow and S&P 500 had set all-time highs just last Friday.

Investors have been worrying that inflation could return after being absent for many years as the economy revs out of the recession brought on by the pandemic. Federal Reserve officials and other economists have said moderate inflation may actually be a good thing in a recovery.

While the latest reading on inflation was hotter than expected, the market shouldn’t be too surprised about inflation rising, said Jeff Buchbinder, equity strategist at LPL Financial. The prevailing sentiment is that rising inflation will be temporary, though “it’s too early to say whether these higher levels are going to be sustained,” he said.

The surge inflation is a reflection of the pent-up demand in the economy, said Terry DuFrene, global investment specialist at J.P. Morgan Private Bank.

“This is not a repeat of the 1980s, when we had hyperinflation,” he said. “This is not something that’s going to be permanent.”

Concerns about rising inflation also raise the question of whether the Federal Reserve will change its posture on maintaining low interest rates as the economy recovers. Buchbinder said investors shouldn’t expect that to happen any time soon, however, given that the economy, and particularly the job market, are still a long way from being fully recovered.

“Really the Fed has one mandate right now, which is to regain full employment, and it’s going to take some time,” Buchbinder said.