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The rise in inflation exceeds analysts’ expectations

Inflation in the US surprised and grew at an unprecedented pace yesterday. Analysts appear to have underestimated possible scenarios. The Core CPI was expected to grow very fast, even the most in this millennium.

As a result, however, core inflation rose by 2.96 percent compared to last year, the highest since 1996 . However, what is probably more important is that the month-on-month growth of the Core CPI was 0.92%, the highest since 1981.

Core CPI rose 2.96% Source: Zerohedge

The classic CPI also grew very significantly. Year-on-year growth is 4.2%. In this case, it means the most significant increase since June 2008. But let's look at what was behind this increase.

We can see that "core services" have probably found their bottom and are growing, which we can partly attribute to growth. However, it is precisely energy prices that are causing inflation to rise. In the chart below, we can see that the rise in energy prices and commodity prices are the cause of the majority of inflation.

CPI composition Source: Zerohedge

Inflation growth is positive for the economy and debt. However, if more than medium-term, inflation as low as 4% will force the central bank (Fed) to pursue a more restrictive monetary policy. For this reason, it may be negative for stocks and bonds, as quantitative easing programs may end before 2022. This is likely to be the case only if inflation remains at similar levels.

Moreover, with current inflation, it would be logical for us to see an increase in yields on (US) government bonds, mostly with medium to long-term maturities. However, we do not see this more significantly. We believe this is because the market either unfairly values bonds or counts current inflation as transitory. As yields are not rising more significantly, but inflation is, real yields are falling to new lows, which means that the general conditions for financing/refinancing remain very attractive.

Real yields Source: Tradingview

In conclusion, we can say that general well-being, resp. living standards may fall . We say this because real average hourly earnings decline the most in the period under review. The Fed is closely monitoring inflation and is unlikely to make hasty decisions before employment improves.

Real Average Hourly Earnings YoY Source: Zerohedge

WALFIR Technologies is one of the three divisions of WALFIR s.r.o., which is based in Slovakia. The primary interests of this division are analytical, quantitative, and algorithmic...

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