April saw the highest increase in consumer prices in 12 years, and fear of long-term inflation and the monetary policies that attempt to combat it has investors shedding stock in sectors that performed well last year.
While the rise in the Consumer Price Index (CPI) was expected, the increase was significantly larger than the amount expected based on a Dow Jones survey. In April, the CPI rose by 4.2% compared to the year before it, the largest increase seen since 2008.
"We do not expect this increase to be replicated again in May, but this will still be enough to lift inflation expectations for the full-year 2021," the Economist Intelligence Unit wrote in a note to investors.
Following the release of the higher than expected CPI data, all of Wall Street's major indexes fell, with the tech-heavy Russell 1000 growth index (NYSE: IWF) seeing the most significant dip of 2.2%.
"There is uncertainty over how long inflation is going to exist within the current economic recovery because we can see increases in housing prices, commodities around the world and increase in demand for goods and services," Brian Vendig, President of MJP Wealth Advisors in Westport, Connecticut, told Reuters. "The uncertainty over the path of rates and inflation is making investors reconsider their portfolios, especially in technology stocks and others that had done really well last year."
While the market retracted, many economists see the current rise in prices as temporary.
"As the cyclically-sensitive components of CPI are still rising at a modest pace, we doubt this report will change the view of officials that inflationary pressures are 'largely transitory,'" senior U.S. economist at Capital Economics Michael Pearce said. "It's just that there's a lot more 'transitory' than they were expecting."
The CPI measures the price of a variety of goods including clothing, vehicles, groceries, and restaurant meals. Even when excluding the more volatile aspects of the CPI like food and energy, the index raised by 3% over the year before and 0.9% month to month. Estimates for these increases were set at 2.3% and 0.3% respectively.
The reason for the increase in CPI is far from a mystery. This time last year, the pandemic was coming into full swing, and now we're finally beginning to see things slowly return to normal. Post-covid demand is expected to skyrocket while supply chains are still suffering the after affects of reduced workforces and materials.
In particular, the global microchip shortage has led to the price of a used car rising by 10%, topping $25,000 for the first time. Increased demand for building materials has contributed to a 124% raise in lumber prices in 2021 alone. Copper, often used as a bellwether for the economy, raised by 36%.
However, some officials at the Federal Reserve and other economists see the connection between the current price-increase and after effects of the pandemic as a good sign. The argument is that inflation being directly related to the pandemic ending would mean that the increase should drop again once production, employment, and demand return to normal levels.
Chicago Federal Reserve President Charles Evans told CNBC that he won't consider a change in monetary policy until employment and inflation increase more significantly. The recent disappointing employment report makes that chance seem unlikely, but Evans told CNBC's "Squawk Box" that the employment situation may not be as dire as it seems.
"It's a little more complicated. We're restarting the economy. A lot of sectors are experiencing growth pains," Evans said. "Hopefully, it's just a one-month kind of thing and we're going to get better employment. I certainly think so."
During the pandemic, investors have enjoyed near-zero borrowing rates while the Fed has consistently bought $120 billion in bonds monthly. With prices rising and employment stagnant, investors belief that the Fed's current stance on maintaining policies as is won't last for long.