HomeHigher Inflation Is Coming – What Does It Mean for Investors?

Higher Inflation Is Coming – What Does It Mean for Investors?

2021 started with the crude oil price making new highs almost every week. The relentless move higher from the negative print seen last year in April is nothing short of impressive. 

So aggressive the move higher is that the financial markets are taken by surprise. After all, the crude oil price suffered long before the pandemic. The move lower from $100 to $30 a few years before the pandemic was so abrupt that it created a deflationary spiral in most of the advanced economies. If we think of the fact that this was right after the 2008-2009 Great Financial Crisis, the deflationary conditions amplified the recession.

Once again, the price of oil is taking the lead, but this time, just the opposite happens. More precisely, the move higher in the crude oil price triggers higher inflation, although most central banks view it as temporary. However, no one argues that it will come –  only that no one knows how high it will get and how long it will last?

Huge Fiscal Stimulus in The United States Adds to Inflation Fears

Americans have placed great trust in Biden’s administration in Washington. After all, the Democrats won control of both the Senate and the House so that they could quickly pass important legislation.

So, they did.

Only a few days after the Senate announced the passing of the fiscal stimulus bill, President Biden signed it into law, and already, savings accounts are receiving the $1,400 stimulus. The process, known by economists as “helicopter money”, is feared of leading to unwanted inflation. A look at the real bond and equity returns versus inflation rates in the last century or so reveals why controlling higher inflation is mandatory for a bank like the Fed.

Tomorrow marks the first time in the new year when market participants will find out the Fed’s projections and the dots plot. Guess what the wild card in tomorrow’s communication is? You guessed it – inflation.

The Fed is yet to let the market know what does it mean by average inflation, and it might just need to explain what moderate inflation means for the central bank. More precisely, financial media will likely inquire for a number, a threshold, so that it will be easier to check if and when inflation exceeds the pain threshold at the Fed.

So far, we know only that the Fed shifted its mandate from 2% inflation to averaging 2% inflation over a period. How long is that period and how much is the Fed willing to let inflation go – these are questions yet unanswered.

Join the Social Trading revolution. Connect with other traders, discuss trading strategies, and use our patented CopyTrader
eToro is the world’s leading social trading platform, offering a wide array of tools to invest in the capital markets
Largest number of currency pairs to trade
Open my Account

We use cookies to personalise content & ads, provide social media features and offer you a better experience. By continuing to browse the site or clicking "OK, Thanks" you are consenting to the use of cookies on this website.