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Planning for Higher Inflation: 2021 Inflation - Overview

 Inflation expectations have reached the highest level in a decade and that has some investors on the brink. Every week we see additional news coverage of rising inflation and long-term interest rates.

In the world of fixed income, interest rates and bond prices tend to be volatile, causing some investors to become overly concerned about declining their bond yields. Stocks, too, maybe affected in a slightly different way. Already, rising investment costs have begun to reduce profit margins, and the repetition of stock rates could be at risk in the future.

Expectations of inflation were halted this year with increasing opportunities in the U.S.'s largest financial package, early signs of progress in vaccine production, and the breathtaking demand from consumers who were previously attached to homes. The demand for Pent-up was reflected in a U.S. sales report last month that posted a staggering 5.3% monthly increase, ending economic growth rates of only 1.1%.

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 The inflation rate, as measured by the Consumer Price Index (CPI), is expected to increase from 1.2% in 2020 to 2.2% this year. Economists disagree on the exact amount, but overall forecasts have continued to rise. For example, Moody’s Analytics expecting a 2.9% inflation rate by 2021, while PNC Financial expecting a 1.6% increase. The high level of forecast distribution is due to the many uncertainties involved in the reopening process.

The International Monetary Fund (IMF) estimates open up challenges in its latest report: “The mitigation in early 2021 is expected to take place in the second half of the boom as vaccines and treatments are readily available, allowing strong communication work to intensify. "However," increasing infections by the end of 2020 (including emerging from new strains of the virus), re-closure of lockdowns, problems with the supply of vaccines, and uncertainty about their availability are key to opposing the good news. "

In addition, The exchange rate is a market-based rate of expected inflation that is calculated by taking the difference between the US Treasury bond yield and the inflation-related obligation of the same maturity. Applying current rates to ten-year bonds shows that market participants expect inflation to be more than the next decade.

After a sharp rise in fruit yields this month, the 10-year commitment currently stands at 1.36% and the current maturity yield of the securities (TIPS) is 0.80%. Subtracting the difference between the two market-based prices shows an expected inflation rate of 2.16%, which represents a sharp increase from less than 1% in the spring of last year.

Other signs of high inflation can be found in rising prices and in the index of renewable commodity prices (PPI). Since last September, the combined price index has risen by 22% and is now exceeding its pre-epidemic rate. Meanwhile, West Texas Intermediate oil prices were set at $ 60 per barrel this month as copper prices rose more than 15% in February, to date.

The manufacturer price index is one of the most popular indicators of inflation that follows the cost of goods from the point of view of manufacturing industries rather than consumers themselves. In January, the US PPI index increased 1.3% from seasonal adjustments - the largest since the introduction of the index in December 2009. Whether high producer prices appear in consumer prices ultimately depends on final demand and on whether producers are willing and able to afford.

While the recent rise in inflation expectations and commodity prices are being discussed, some economists say the reversal of inflation indicates a lack of purchases from the closure that could disintegrate quickly as activity continues to normalize. Also, commodity prices can be kept to check for additional offerings such as new oil rigs that return to the energy market. The time-tested economic axiom says there is no solution to high prices.

The US Federal Reserve is closely monitoring inflation to determine if this year's inflation is short-lived compared to the long-term process of building stable inflation. The Fed has made it clear that it accepts inflation of up to 2% and possibly slightly higher. However, inflation above that level will fluctuate in the long run.

However, another Fed’s mandate to support full-time employment may have received higher priority. The unemployment rate in the US was 6.3% in January, much higher than the 3.5% figure sent earlier last year. Restoration of businesses, which has been hit by government-linked travel epidemics while repatriating unemployed citizens, will be prioritized over prices. Therefore, we do not expect any movement in interim interest rates over the next few months.

Given the potential for continued inflation, investors should consider having inflation protection in their portfolios. These assets may include financial security securities (TIPS), real estate investment trust (REIT) assets, and the general stock of companies that are able to transfer high costs to their customers. New companies that disrupted traditional business models with cutting-edge technology and cheap stocks of low-value bets in the area.

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