Inflation is back! The consumer price index is over 5%. Many prices have risen far more due to shortages caused by production and shipping bottlenecks. Used cars, as an example, are up between 25 and 42% since the beginning of the pandemic.
Is this a temporary spike or is a 1970s-era of rising wages and prices developing? Employers can’t find qualified employees, and are increasing wages and benefits in response. That suggests inflation may not be a short-term phenomenon.
Inflation expectations are also running high with one-year expectations reaching 4.6% in a recent survey. Expectations have a way of becoming self-fulfilling, as people accelerate purchases to beat future price increases.
But sustained inflation is likely to be countered by the Federal Reserve increasing interest rates to cool the economy. Higher interest rates will decrease bond values, making new bonds more attractive to investors than existing bonds.
Inflation has been relatively tame for a long time, but that may be changing. If so, investors will have to make hard choices about their assets and expenditures.
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