Wall Street Roiled By Hot Inflation Data: Is This Really “Transitory”?

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The Labor Department reported yesterday that the Consumer Price Index jumped 4.2% from the prior year. Although a big rise in the CPI had been expected, the actual number came in even higher than economists had forecast. 

According to the CPI data, inflation in April accelerated at its fastest pace in more than 12 years. Higher prices showed up everything from used cars to lumber to energy to food.

If April’s rate of price increases were to persist for another 11 months, the annual CPI growth rate would be 10.3%. And that wouldn’t even account for items that the CPI excludes or understates.

Jerome Powell and other Federal Reserve officials have repeatedly insisted than any rise in inflation this year will be “transitory.” They cite base effects from last year’s economic lockdown and supply bottlenecks they expect to be temporary.

But investors appear to be concerned that inflation is now becoming a much bigger problem than the Fed acknowledges.

Emergency government benefits pumped into pocketbooks and a record-high budget deficit that shows no signs of narrowing will have lasting effects. The cycle of spending, borrowing, and printing by the trillions looks to be more of a permanent than a transitory practice in Washington.

Stocks, bonds, and even precious metals got hit with selling following the CPI report. However, gold did show relative strength versus the S&P 500, which lost 4% for the week through Wednesday’s close. Gold was down a mere 0.5% over that period.

Gold and silver also succumbed to some modest selling pressure through Wednesday – though they both held up better than the stock market.

Naturally, many precious metals bulls were disappointed that gold and silver didn’t scream higher on the inflation news. The reason they didn’t has a lot to do with interest rates. Bond yields moved up and futures markets began pricing in higher probabilities for a Fed rate hike by the end of the year.

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