Stocks jumped to record highs this week with retail sales and weekly jobless claims signaling an accelerating recovery. Yields on benchmark 10-year Treasury notes dropped the most since February. Economic data released on Thursday showed that some parts of the U.S. economy, like retail sales, have returned to or exceeded pre-pandemic levels. Applications for unemployment benefits, while still high, hit their lowest point in 13 months.

Uptick in retail sales is a good indication that the latest round of $1,400 direct checks are making their way into the economy, providing the stimulus intended by the White House. The New York Fed said last week that 42 cents of every stimulus dollar were being saved, while 25% of funds are being spent and the rest is being used to pay down debt.

The negative effects of the recovery are already showing up. US consumer prices rose sharply in March, driven primarily by 9.1% jump in gasoline prices while Core CPI, which excludes food and energy, climbed 1.6%. This indicates a major shift in pricing power from consumer to businesses which could continue to play out in the coming months as the economy reopens from the pandemic.

Future Wealth’s View

For those who have ventured out to diners, pubs and restaurants, the sticker shock must have been obvious already. $7 beers are now $10, $8 cocktails are now $15, $25 large pizza is now $35 and so on. Hotels are raising prices but keeping reduced services. Airlines and Car rental agencies have followed suit. Consumers are so starved from being locked in for a year that they would willingly pay these high prices especially when the money they are spending is from the stimulus check.

Net result is that inflation is here and it would behoove investors to begin to address the impact of higher inflation on their portfolios. It would be a grave mistake to completely trust the Fed which appears to be dismissing the rising inflationary indicators as temporary. While it may be true that the Fed is unlikely to raise interest rates until it sees PCE (personal consumption expenditure) inflation above 2% and full employment has been achieved, we expect the stock market to reflect the impact of higher inflation ahead of these numbers being published in print.