Inflation is almost certainly the hottest topic in finance nearly five months into 2021.

Currently, the Consumer Price Index (CPI) isn’t rising at an alarming rate, but the combination of rampant government stimulus, soaring commodities prices, and supply shortages, among other issues, has some market observers convinced material CPI increases are merely a matter of time.

As Nationwide’s Mark Hackett points out, recent market action isn’t unhealthy.

“Equity markets have entered a choppy period, with the S&P 500® Index unchanged since mid-April, as the tug-of-war between strong fundamentals and inflation worries continues,” he writes. “Following the extraordinary rally since the March 2020 bottom and particularly since November, a period of consolidation for the market is not unexpected or unhealthy. Markets are likely to continue in a saw-tooth pattern until we grow into our valuation.”

The Commodities Conundrum

As noted above, rising commodities prices are one of the primary signals market observers are using to gauge inflation. They’re right to look in that direction because commodities are one of 2021’s best-performing asset classes.

“Commodity prices continue to reflect strong global demand and stressed supply chains, with the Goldman Sachs Commodity Index up 26% this year to the highest level since 2014,” notes Hackett.

Perhaps confirming that higher CPI readings are right around the corner is the fact that the commodities rally is broad-based in nature.

“The year-to-date rally is consistent across energy, industrial metals, and agriculture, with gold among the few that have declined,” said Hackett.

In terms of various asset classes, Hackett says commodities and equity investors are proving more jittery.

“Commodity and equity investors have been more reactive to inflation fear than bond investors, which is not uncommon,” he added.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.