Everyone Will Be Watching The Inflation Report
The Consumer Price Index for April will be released tomorrow at 8:30am Eastern
The Consumer Price Index (CPI) is the measure the government uses to ascribe a number to inflation, or the increase in consumer prices. The CPI measures price increases in all areas of consumer items except energy and food. The CPI numbers for April are being released tomorrow and are expected to be the largest increase in nearly ten years. The predicted inflation increase is a whopping 3.6% !
Any number that is significantly higher or lower than the predicted 3.6% will cause a jump in the markets. People who are functioning in the real world know that prices for items have gotten much more expensive over the past few months. Between the Government printing record amounts of money and supply chain issues caused by covid, everyday consumer items have gotten wildly expensive. Almost every CEO on their earnings call has been discussing the effects of inflation in detail on their operating margin. Even Warren Buffet stated at his annual shareholder meeting that, “they are seeing significant inflation”.
My prediction is that the inflation numbers will come in higher than 3.6% and likely will be near or above 4%. This is especially likely as April 2021 numbers will be compared to April 2020 numbers. April 2020 saw significant price decreases due to covid and lockdowns. If the inflation numbers come in higher than estimated, stocks will likely fall because it may force the Federal Reserve to raise interest rates faster than expected. However, if the inflation measurement comes in lower than predicted, stocks will likely rise because it will signal that the Federal Reserve can keep their monetary policy of zero interest rates for much longer.
Personally, I am betting that the inflation rate comes in higher and that stocks will go lower. To capitalize on this, I bought puts on the SPY index. This is a risky trade as it can go either way, but I have personally experienced the rising costs of goods and services and believe the inflation rate will come in higher than 3.6%. Trading is about making sensible bets, and assessing probabilities. In this case, it is likely a safer bet that inflation will come in above expectations, not below.
As Always, Happy Trading!
**Reminder, this is not financial advice. If you are seeking financial advice, please contact a licensed financial advisor**