Open signs are flickering on across the country, furloughs are coming to an end, interest rates are at near-zero, and a familiar fear is haunting the minds of investors: the fear of inflation.
Over the past few weeks, inflation fears have sunk many a market rally, and not just investors are concerned. According to new data recently released by FactSet, a record 175 companies on the S&P 500 (NYSE: SPY) broached the topic of inflation in their latest earnings calls.
In particular, 84% of companies in the consumer staples sector mentioned concerns about rising prices, in addition to 75% of materials firms who reported similar concerns. According to similar data released by analysts at Bank of America, the costs of raw materials, transportation, and labor are rising across the board, translating into rising prices. As a result, the Consumer Price Index jumped 4.2% in April, which is the most significant year-over-year increase since 2008.
For investors, the concern is that prices could rise faster than people's paychecks.
These higher prices could also drive up interest rates, which could push investors out of equities and into bonds.
In April, just 266,000 new jobs were created-far fewer than the 1 million or so jobs economists had anticipated. If this trend continues, more and more families could struggle to make ends meet, potentially leading the Federal Reserve to raise rates to curb inflation.
Such an outcome would likely send markets reeling, causing investors to flee to bonds, which would ultimately push major averages into correction -- or even recession-- territory, just as the economy is getting back on its feet.
Despite this risk, time and time again, the Fed has employed the refrain that "substantial further progress is needed" on employment before the central bank makes an effort to head off inflation. The Fed insists that these ongoing price hikes are transitory and that today's low-interest rates, and the ensuing inflation, are necessary to bring the economy back to full employment.
"The way in which we bring supply and demand into balance in the labor market, especially in the service sector, may take some time and may produce some upward pressure on prices as workers return to employment," said the Fed's Vice Chair Richard Clarida in a statement. "We have to be attuned and attentive data flow."
"As we go through the year," officials at the Fed will assess the data and will take action based on that data, Clarida added. The Vice-chair also emphasized the fact that April's job figures indicate that the labor market hasn't caught up with the rest of the economy.
The bottom line here is that until we have several months of solid job figures under our belt, the Fed is unlikely to do anything to address inflation. And so, for 175 of the S&P 500, inflation will likely remain a concern for next, for the rest of the year, and beyond.