Inflation That Refuses to Go Down
Inflation That Refuses to Go Down
After a period of consolidation in early June, market volatility has returned over the past few days. The S&P 500 Index hit its lowest level since January 2021 while benchmark bond yields (U.S. 10-year yields) have reached a new high of nearly 3.48%.
While most of the risks seen since the beginning of the year are still present, the slump of the last few days can mostly be attributed to inflation. Much to investors' disappointment, the Consumer Price Index (CPI)* rose 8.6% on a year-over-year basis in May, its highest level in 40 years. The market response to the release was particularly negative as most economists believed that the peak in inflation had been reached in March.
*The Consumer Price Index (CPI) is an indicator of the variation in consumer prices paid by consumers and is used to measure inflation.
Our CIO Office’s views on the situation
At this point, it is important to note that all is not lost. First, the impact of the monthly increase in the price of Brent crude oil (which rose from $106 per barrel to $122 in May), should fade in June.
It should also be noted that core goods inflation, which fell from 12% to 8.5% in May, should continue to decline as consumers continue to shift their spending to services in this post-pandemic environment.
A Look Ahead
Ultimately, the task before central banks is to slow the economy so that inflation subsides, without causing a recession. The success of this "soft landing" will be the determining factor behind market performance in the coming months.
Feel free to listen to this podcast starring our chief economist and strategist, Stéfane Marion, where he discusses inflation, economic growth and the markets. Here is the link to access it.
Click here to listen to the podcast.
Finally, we remain available to answer your questions!
Sincerely,
Cathy et Guillaume
514-871-3474