Liz Looks at: the Risks and Realities of Inflation

A Weekly Column with Liz Young Thomas

Liz Young Thomas is SoFi’s Head of Investment Strategy, responsible for providing economic and market insights. Liz is passionate about educating others on markets and investing in order to help people feel empowered to take a more active role in their financial futures. This week, see what Liz has to say about inflation.

The Risks and Realities of Inflation

We’ve heard about the threat of inflation for weeks, even months, and now the data is starting to reflect it as fact. But is it a temporary phenomenon or will it persist?

The Consumer Price Index (CPI) rose 4.2% year-over-year (YoY) in April, surpassing expectations of 3.6%, and marking the first reading above 4% since Sept. 2008. Those figures may look alarming, and the expectations of inflation have driven market volatility in recent days. But there are reasons why I don’t think we should be overly concerned…yet.

The headline YoY number is the percent change for April 2021 vs. April 2020. We were in almost full shutdown mode for April, May, and June of 2020,and inflation readings barely had a pulse. Using that low base, the YoY data is going to seem quite large.

Let’s look at the items that drove CPI this month, namely used cars and trucks. They saw the largest increase since this measurement began in 1953! If people are buying more cars and trucks, they’re also buying more gasoline, which contributed a lot to the YoY change. Additionally, the number of daily air travel passengers is rising and hit a post-pandemic high of 1.7 million people on May 9th, driving more fuel demand.

These forces should be temporary. After all, people can’t buy new cars or go on air travel vacations every single month.

The future question is, will there be forces that drive inflation and stick around? Things like commodity prices, food prices, housing, and eventually wage increases that may be necessary to find workers.

The immediate question is, what will markets do in the meantime? Inflation fears are likely to continue pressuring technology and other high growth stocks. I’d also expect a continued rise in the 10-year bond yield. This is natural, and is characteristic of the rotation from growth into cyclicals that’s been largely in place since last fall. But rotation doesn’t mean exit, it means change of focus.

In my view, inflation isn’t a problem if it’s the result of a growing economy as long as price increases don’t rage out of control. I think we should see higher inflation as growth picks up and pent-up demand is released. But take the next couple months of inflation readings with a grain of salt; we can more accurately decide if this is temporary later in the year.

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