Rising prices have led consumers to hedge against inflation. Projections indicate prices will continue to rise, with even the Core CPI in the United States eventually catching up.
Today is the first Friday of the new trading month. As is customary, the NFP release in the United States will seize all the economic headlines today. The other headline-maker this week has been the spectre of rising inflation.
For traders and investors, inflation is of crucial importance. Currency traders know that central banks have an inflation-controlling remit. In short, they adjust interest rates so that inflation remains close to a desired target. This is the price stability mandate of every central bank in the developed world.
Investors typically have a longer-term horizon. They like to interpret economic fundamentals and aim for real gains at the end of the year, net of inflation. But if inflation is poised to rise, as indicated by recent data, the market participants and consumers alike will look for ways to hedge against it in the months ahead.
Signs of upcoming rising inflation are everywhere. US small businesses raised prices during the pandemic to levels not seen for a decade. The apprehension is not necessarily about the level of rising prices, but the manner in which it was achieved – in a vertical line.
The US Core CPI typically follows the small businesses’ change in prices, and so the Fed may be forced to deal with higher inflation sooner than expected.
Housing Prices Go Through the Roof
In periods of rising inflation, or when rising inflation is anticipated, investors and consumers turn to alternative investments, such as real estate.
This is being confirmed, as we see housing prices rising at their fastest pace in more than fifteen years. The time a property stays on the market is down to less than a week, suggesting buying pressure will continue. Once again, real estate is acting as a hedge against inflation.
Lumber is up 530% on the year, and continues to rise. When we look at the lumber charts, we see that it is acting in a similar fashion to a cryptocurrency, except that lumber is a commodity, and a classic hedge against inflation. Lumber is harvested during periods of high prices and trees are left to grow when prices decline.
The ISM Manufacturing report in the United States released a few days ago showed that the prices paid are at extremely elevated levels. The last time that the prices paid index was as high as we saw in April, inflation was at over 5%.
The US government has taken action, with US Treasury Secretary Janet Yellen suggesting this week that the reallocation may result in some small increases in interest rates. The markets didn’t like this remark, and they dropped in an instant. Nevertheless, unless they intervene strongly, the Fed and the Treasury may find themselves behind the inflationary curve much sooner than they expect.