Inflation has arrived in a big way.
The Labor Department announced Thursday that the Consumer Price Index (CPI) climbed 5.0% over the last 12 months, the largest bump since the 5.4% increase for the year-long period ending August 2008.
The core-price index, which excludes categories with high volatility like food and energy, increased 3.8% in May from a year prior. That was the largest such increase since June 1992.
Used car and truck prices skyrocketed 7.3% from the prior month, which had seen prices rise 10%, and caused about a third of the overall index’s increase. Price indexes for consumer goods like furniture, airfares and apparel also jumped in May. Energy prices have gone up 28.5% in the past year.
But rising inflation is not the big news of the week.
Instead, it’s the fact that the 10-year Treasury yield has been dropping for days and is now sitting below 1.5%.
Some people are shocked and wondering how interest rates could be dropping with rising inflation. But when you dig into the details of the latest CPI readings, what looks to be happening is giving more and more credence to the Federal Reserve’s view that this recent inflation is transitory.
Now, I realize a wide variety of industries are seeing prices rise, from used and rental cars to food manufacturers to hotel rooms. But the increase is not that surprising when we consider the bigger picture of where the economy has bounced back from, and where it’s headed.
COVID-19 infection and mortality rates continue to rapidly decline thanks to vaccinations. People are getting out and about, buying and spending up a storm on goods and services they cut back on during the height of the pandemic.
Increasing consumer spending has been fueled by more businesses easing restrictions, a flood of trillions of dollars in federal economic relief programs, increased household savings and a rising GDP.
A group of economists surveyed by The Wall Street Journal estimate the economy will grow at an 8.1% clip during the second quarter, while 2021 could post one of the best rises in GDP since the 1980s.
If anything, it looks like the Fed’s biggest current priority involves its mandate to keep unemployment low. The good news on that front is that initial unemployment claims recently dropped a little more than expected.
On Thursday, the Labor Department said initial claims for unemployment benefits fell by 9,000 to 376,000 for the week ended June 5 — the lowest since the week of March 14, 2020, just as the pandemic began its rampage around the world. A week later, over three million people filed and by April 2020, more than 6.1 million filed. The latest unemployment numbers also mark the sixth-straight week that initial unemployment claims have decreased.
Clearly, we’re starting to see an improvement in the jobs market, but we still haven’t achieved the Fed’s goal for full employment. In my opinion, the Fed’s unemployment goal is 4%. So, until we reach that level of unemployment, I don’t expect the Fed to take any action to curb rising inflation.
The bottom line is that while there may be inflation out there, it’s not showing up yet in the bond market. And that is good news for the stock market.
How to Play the Inflation
Even better news for my Growth Investor subscribers is that growth stocks still remain the best historical inflation hedge of all time.
And our Growth Investor Buy List stocks represent the crème de la crème. They are characterized by 62.6% average annual sales growth and 57.1% average annual earnings growth. Our Growth Investor stocks have also benefited from positive analyst revisions, as earnings estimates have been increased by an average 17.8% in the past three months.
The bottom line: I look for investors to continue to flock to inflation hedges like our Growth Investor stocks in the coming weeks and months. So, our Buy List stocks should profit from the inflation boom and represent an oasis for investors who are frustrated by the current low interest rate environment.
P.S. If you’re interested in my Growth Investor service, now is the perfect time to join. I recently released my Growth Investor June Monthly Issue with five new buys, my latest Top 5 Stocks list, as well as my outlook for the market this summer.
Note: The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owned the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below: