The Inflation Debate Continues

Look beyond the headlines to discover the driving forces behind market trends and consider how they impact a credit union’s investment portfolio.

Financial markets have been relatively tranquil apart from ever-volatile crypto-currencies thus far in the second quarter versus the first three months of 2021. Treasury yields have settled into a tighter range, perhaps desensitized by a Fed steadfast in its commitment to current policies and adamant that inflation is not a concern. The U.S. economic recovery has been robust, and the phrase supply-chain bottlenecks has become popular jargon to characterize obstacles amid the reopening effort.

3 Takeaways For June

  • The second quarter has proven calmer for financial markets relative to Q1.
  • The April CPI report showed the biggest monthly gain in core prices since 1981, driven by large increases in prices for used cars, airfare, and lodging.
  • The transitory versus sustained inflation debate persists in the economist community; wage inflation and consumer inflation expectations are worth monitoring for signs of sustained inflation pressures.

On the fiscal front, the White House and Congressional leaders continue to negotiate the Biden administration’s infrastructure spending plan, including both the scale and funding source i.e., tax hikes and late last week President Biden released an ambitious budget proposal that calls for $6 trillion of federal spending in 2022. The White House budget proposal is closely aligned with the current push for spending on infrastructure, public health, and education. It also calls for increased taxes on corporations and wealthy individuals. Critics of the current spending initiatives worry that it further fuels inflation risks given already-strong economic fundamentals and Fed support. Fiscal budgets are still controlled by Congress, and with slim Democrat majorities in both the House and Senate, the tax proposals are already meeting resistance from both Republicans and moderate Democrats, the latter of which are worried about the potential impact on 2022 midterm elections, according to media reports.

An inflation debate has captured the economist community for much of 2021, and the April CPI report provided additional fodder for both sides of the argument. The Fed remains firmly entrenched in the inflation will be transitory camp, suggesting any 2021 price increases will be driven by temporary supply bottlenecks as the global economy reopens from the pandemic, but critics contend the price increases will be stickier than Fed leaders and other inflation doves currently expect.

This market commentary is provided by ALM First Financial Advisors, LLC, the investment advisor for Trust for Credit Unions. Visit trustcu.com to read about the latest economic data and overall market trends.

June 14, 2021

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