Obviously most of the drop in tech is caused by fear over lasting inflation and rising interest rates. This is something that hasn’t actually happened, but there is anxiety that it might happen. Personally, I think that this sounds mostly transitory, I believe that the Fed will keep interest rates low, I don’t trust the market when it’s so anxious over something that hasn’t happened yet (I don’t trust anxiety in general), and lately I’ve been buying more tech shares for the long-term.
Apologies if most of this has been covered already – Haven’t been on here much lately.
The April consumer price index shot up a seasonally adjusted 0.8% (the biggest jump since 2008). However, changes in this index are driven by just a few sectors, rather than an across-the-board price change.
Much of this increase was driven by used car and truck prices, which jumped 10% during the month (by far the biggest of any major category in the index). Rental car companies sold off most of their fleets at the start of the pandemic, and in April there was a surge in buying by these companies. Additionally, global semiconductor shortages is reducing production of new vehicles, and causing increased demand in pre-owned vehicles (from dealers who would usually be buying used cars from rental car companies, rather than the other way around at the moment). Used car sales are up 58% from a year earlier.
Other price increases, such as lumber and some electronics, are also tied to short-term supply chain issues.
Stimulus checks causing increased demand could also be a cause, but this is more difficult to measure.
Most categories in the index were actually lower. Food prices grew 0.4% (driven by demand for takeout), and energy was down 0.1%.
It’s also pretty obvious that there is pent-up demand for services that were unavailable during the height of the pandemic in the US, which may result in short-term jumps in prices.
Also, this Bloomberg article explains the Fed’s position well: https://www.bloomberg.com/opinion/articles/2021-05-12/inflation-is-not-just-inevitable-it-s-part-of-the-fed-s-plan?sref=Hjm5biAW
Under Jerome Powell the Fed has adopted a policy known as ‘Average Inflation Targeting’. That means the Fed will make up for quarters in which inflation is below its 2% target by allowing inflation to run above target for a while, so that over time inflation averages roughly 2%. The coming bump in inflation gives the Fed the opportunity to demonstrate its commitment to this new framework. The Fed’s preferred measure of inflation, core PCE, rose 0.9% from March and is likely to rise well above 2% in the second half of this year. That’s fine, because core PCE came in at only 1.4% for all of 2020. Even if inflation ran closer to 3% for the rest of the year and all of the next, the longer-run average would still be near of below 2% (it has averaged 2% or less every year since 2007). If the Fed makes it clear that average really means average, it’s credibility will be strengthened, not weakened. Raising interest rates in order to deal with temporary supply chain issues that are especially acute in a handful of sectors doesn’t make a lot of sense.
