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The USA’s Possible Inflation Spike
From rocky relations with China following the eruption of the COVID-19 pandemic, to the 1.9 trillion dollar stimulus checks, the country has been at the top of every headline about economics. Now it’s showing up on the headlines for a different reason: inflation.
08 May, 2021

Being locked inside on and off for god knows how many months has inevitably had its fair share of influence on the market economy. From the shutting down of shops that were deemed non-essential at the height of the pandemic, to the reduced dining space available due to outdoor-dining-only restrictions imposed by many Western states has caused a shift in the normal amount of consumption shown by us regular people. And the United States of America has not been able to avoid this irregularity. 

If you have been looking at the news lately, you may have encountered a few articles arguing for different positions regarding the situation of the US economy. From rocky relations with China following the eruption of the COVID-19 pandemic, to the 1.9 trillion dollar stimulus checks, the country has been at the top of every headline about economics. Now it’s showing up on the headlines for a different reason: inflation. 

When I myself looked at the news, I was confronted by many different tones of writing regarding the “inflation spike” in the US. While the Economist mentioned that there was indeed a “spike” in neutral terms, CNBC brought to light some grim statistics whereas Bloomberg was skeptical about whether or not the inflation panic was based on sound ground, and called it a “mirage”. What we know is this: US inflation could hit 3 or 4% by the middle of 2022, as a veteran strategist warned. This is much higher than the central bank target of 2% inflation, even though “it has said that it is willing to allow an overshoot in order to make up for past shortfalls.” This information is backed by the fact that the “core” consumer price index (CPI) rose 0.6% in March from the previous month, which stood at 2.6% a year ago. But why is the US experiencing such an increase in inflation? 

The answer is simple. Relaxation and the relief of spending everything you had saved during the lockdown. David Roche, president of the investment firm Independent Strategy, says that “The reason prices will rise, and really there are a couple of things, is that you’re going to end up with, on the other side of Covid, huge demand as consumers spend the excess savings which they have accumulated.” So it is simply a demand and supply graph applied in real life, as Americans start spending more than they had during the last year as lockdowns ease and cities start to reopen. As demand and spending get high, so do the prices. Right now, investors see great uncertainty over inflation, as “investors shore up defences against rapid rises in US inflation.” Data released last week shows that investors have bought up a total of 14.4 billion dollars’ worth of inflation-protected treasuries. David Riley, chief investment strategist at BlueBay Asset Management, has also said that “It’s not that the market has become inflationist. It’s that the market is uncertain.”

Arend Kapteyn, chief economist at investment bank UBS, has mentioned that investors are in a “shoot first and ask questions later” mentality regarding hedging against inflation, as long-dated Treasuries suffer the “heaviest sell-off in four decades” during the first quarter of 2021 as the economy outlook brightened. One indication of the inflation has been that such sell-off has lost steam, with the benchmark 10-year Treasury note falling down to 1.55% in April from a 1.8% in March. “Yields fall when prices rise.” 

For now, with the conflicting arguments and perspective we have on the issue, all we can do is just wait and see what happens. However it wouldn’t be a surprise if inflation did reach levels of 3 to 4% by mid-2022, as the shift in spending due to the easing of restrictions would inevitably cause prices to rise as we go back to how life used to be. Allowing a period for getting used to the way things were, and enabling people to bounce back would not be an overshoot, as the causes of this inflation are temporary and will not do much long-term harm. 

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