The U.S. economy is getting hot and one market bull says investors could be in for a rude awakening later this summer. Here’s what you need to know now.
There’s been a lot of talk about inflation lately as the U.S. economy opens back up.
On Thursday, the Labor Department said that the headline consumer price index—which tracks food prices, energy, groceries, housing costs, and other goods—rose 5% year-over-year in May, the fastest pace in nearly 13 years.
While investors shrugged off the higher-than-expected inflation as “transitory,” there are clues that it may not be.
Just two weeks ago, the Commerce Department reported that the Core PCE index—which excludes food and energy—jumped the most since July 1992 in April, rising a faster-than-expected 3.1%. The Core PCE is a key indicator watched closely by the Fed.
The Core PCE report for May is due on June 25, and it could show an even greater rate of inflation.
“Inflation levels are going to keep rising,” said Federated Hermes chief market strategist Phil Orlando. “That’s going to raise some questions. Is the Fed going to make a policy adjustment at an FOMC meeting or perhaps at Jackson Hole?”
And that could spook Wall Street, putting investors in the crosshairs of what could be a turbulent summer.
“Those levels of inflation are rising, perhaps at a level a little more aggressive than the Federal Reserve expected,” Orlando said, adding that it could push Fed chair Jerome Powell out of the “transitory” camp by the end of the summer – paving the way to tapering sooner than expected.
And Orlando says he believes that’s the biggest threat to the market.
“That’s the potential risk for the market that interest rates rise because of inflation, and that impacts the discount rate in terms of valuation for stocks,” he said. “All of those issues are going to sort of come together and… maybe serve as a wake-up call to the market in sort of this late July – early August time frame.”