Inflation Fears Seeping into Market Activity

After months of calm market activity, inflation has resurged and put markets into a volatile position. Longer-term treasury securities saw a drop in prices even despite having been resistant to inflation changes in the past. On the other hand, The Dow Jones Industrial Average fell 240 points by 0.7% whereas the NASDAQ composite Index suffered by 264 points or 1.7%.

Since yields rise with falling bond prices, the 10-year Treasurys saw one of its largest rise this year. The Wednesday’s CPI report revealed inflation levels at 6.2%, the fastest pace seen in the last two decades. Investors are gearing up for upcoming Feds decisions which may take on a more aggressive stance. Lou Brien, strategist at DRW Trading Group said, “This is not a panic reaction. It’s much too soon to assume the Fed will quicken the pace of its expected moves to boost interest rates over the next year or so.”

On the other hand, as holiday season approaches, consumers may feel the higher prices on commodities and goods. Prices of every item is expected to be higher than before. Many people have expressed concerns about high prices of food and fuel which will bring down their level of disposable income. Many investors are worried that inflation may continue well into next year and will affect larger markets including housing as well.

The Biden Administration has vowed to tackle the ongoing inflation and minimize the effects which could wreak havoc on the economy. It has been noted that inflation eliminates purchasing power of fixed-interest payments on bonds and lead to hiking of rates. Investors are hopeful that increase in interest rates by Federal Reserve will counter hyperinflation and in turn increase bond purchases.