The Great Inflation Debate
The S&P 500 declined 4.0% from May 10 to May 12, the largest three-day selloff in five months. The Nasdaq composite declined 5.2% and the Russell 2000 index of small capitalization stocks declined 6.0%. We believe investor concerns about inflation sparked the pullback.
On May 12, the U.S. Bureau of Labor Statistics reported that its widely followed Consumer Price Index increased 4.2% in April as compared to the year ago period.1 The CPI increased 0.8% as compared to the prior month, seasonally adjusted. These price increases were higher than expected.2 They were also an acceleration from the growth rates reported in March. The annual increase was the largest in twelve years.
Investors had been bracing for higher inflation to show up the data. One reason is that prices in the year ago comparison period were depressed by the pandemic, a phenomenon known as the base effect. But growth in the April price index as compared to the prior month also accelerated, which cannot be attributable to the base effect.
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