Inflation soars to 5%, but investors view it as temporary

The most recent consumer price index data, which was released yesterday, indicated that the annualized inflation rate is now at 5%. This is the highest level of inflation since the recession following the banking crisis in 2008. However, by looking at market action since the report was released, it seems investors and traders largely ignored the numbers under the assumption that much of the goods and services that have been costing more represent a spike that is temporary rather than sticky (sustainable). In fact, the majority of many of the goods and services that have had dramatic price increases are unquestionably temporary, such as goods that are experiencing supply-chain issues.

One example is the rising prices of used and new automobiles. The recent price spike is directly attributable to the shortage of microchips. These supply-chain issues stem from the fact that global production in a multitude of different types of manufacturing facilities was forced to shut down their production lines due to the pandemic.

As reported by MarketWatch today, Daniel Vernazza, chief international economist at UniCredit Bank said, “And for service sectors hit particularly hard by the pandemic, including airfares and accommodations, the reopening of the economy has led to only a partial recovery of prices, which are still not back to pre-pandemic levels.”

He also said that “It’s a somewhat different story for car rentals, where acute supply shortages have caused prices to surge, while spending in the sector remains well below pre-pandemic levels because of limited supply, he said. For used cars, the combination of a switch away from public transport by commuters and a global shortage of semiconductors for new cars has pushed up both demand and prices.”

His conclusion after analyzing all the data was that “since higher inflation is largely explained by the reopening of the economy and supply shortages, it’s likely to prove temporary as the direct effects of the pandemic fade and supply adjusts to meet demand.”

It seems as though the vast majority of market participants are in agreement with the above assumptions that much of the recent surge in inflation is temporary. Gold, for example, was able to breach $1900 shortly after the release of the CPI data this week. However, that higher price point was unsustainable, and $1900 once again returned to being a technical area of resistance rather than the next level of support. As of 5:20 PM EST gold futures basis, the most active August 2021 Comex contract is currently trading off $16.90 (-0.89%) and fixed at $1879.50.

Our technical studies indicate that major support for gold prices remain approximately $30 below current pricing at $1845, which is based upon a combination of the 200-day moving average and the 61.8% Fibonacci retracement at $1844. The studies also indicate that resistance begins at $1900 to $1905, with major resistance at $1920, the highest trading level since this rally began at the end of March 2021 when a double bottom at $1692 was identified. Nonetheless, the rally from $1692 to the current pricing of $1879 shows a net gain of $184 since March 31, which most certainly represented a major increase in the value of gold. Lastly, even with this last corrective price from the highs of $1920 and the testing of $1850, there was never any major technical chart damage which means that the bullish faction is still wielding a big stick.

Wishing you, as always, good trading and good health,