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The “transitory” inflation promised by our central banks is looking increasingly elusive. So is the promised end to the pandemic. The two combined to send stocks plummeting on Monday.

On the inflation front, the year-over-year figure for June in the United States was 5.4 per cent, well above expectations. The May figure was 5 per cent. The Wall Street Journal reported this was the fastest rate of increase in 13 years. The consensus among economists was for a slight drop to 4.9 per cent.

June figures for Canada are not yet available. May showed a 3.6 per cent year-over-year gain.

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The U.S. Labor Department reported that core inflation, which strips out the volatile components of food and energy, was up 4.5 per cent in June.

A 10.5-per-cent increase in the price of used cars and trucks accounted for about one-third of the June increase.

The news came as a disappointment to those who want the U.S. Federal Reserve Board to continue its accommodative monetary policy, which is critical in supporting the booming stock market. The Fed had previously indicated it would not raise interest rates until 2023, but unless the rate of inflation decelerates it may be forced to act sooner.

Fed chair Jerome Powell is still sticking firmly to his dovish outlook, however. In testimony before House and Senate committees last week, he maintained the inflationary bulge is temporary and that the Fed will continue its accommodative policies until the economy is fully recovered.

Canada is also experiencing inflation in excess of the Bank of Canada’s 1-per-cent to 3-per-cent target range, but Governor Tiff Macklem echoes the Fed line: It’s just temporary. In the opening statement on last week’s release of the Monetary Policy Report he cited three reasons for the surge, all related to the pandemic.

  • Gasoline prices rebounded from very low levels a year ago and are now above prepandemic levels.
  • Other prices that had fallen sharply last year with plummeting demand are now recovering to more normal levels with the reopening of the economy.
  • Disrupted global value chains and pandemic-related supply constraints, including shipping bottlenecks and a global shortage of semiconductors, have pushed up the prices for cars and some other goods.

“Overall, supply bottlenecks are creating sharper movement in prices that is pushing inflation temporarily higher, and these supply issues now look more important than previously thought,” he said.

The bottom line is that inflation is expected to be above the target range for the rest of 2021 but will ease back to toward 2 per cent the following year.

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That’s the official outlook but Mr. Macklem threw in a caveat: “We expect the factors pushing up inflation to be temporary, but their persistence and magnitude are uncertain, and we will be watching them closely.”

In other words, we really aren’t that sure.

The magnitude of the U.S. increase “will likely revive the worries that inflation may not fade as rapidly as the U.S. policy makers first thought, and should, in theory, boost appetite in stocks of businesses which could more easily pass the rising material costs on to their clients,” wrote Ipek Ozkardeskaya, senior analyst at Swissquote Bank SA.

That would normally suggest resource companies, and some have posted some decent gains this year, even with Monday’s retreat. Teck Resources Ltd. is up 10.5 per cent in 2021, BHP Billiton PLC is ahead 11.3 per cent, and potash producer Nutrien Corp. , has gained 19.8 per cent. On the other hand, West Fraser Timber Ltd. , is ahead only 3.2 per cent, as lumber prices have dropped sharply.

We’ve seen big gains in the banks, which profit from higher interest rates. As of Monday’s close, Royal Bank of Canada was ahead 20 per cent for the year. Toronto-Dominion Bank has gained 13.8 per cent. Bank of Montreal has advanced 26.4 per cent. Canadian Imperial Bank of Commerce is up a very impressive 29.3 per cent for the year. National Bank of Canada has gained nearly as much, at 29 per cent.

Gold, a traditional inflation hedge, continues to languish with the S&P/TSX Global Gold Index off 5.6 per cent year-to-date.

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The combination of inflation concerns and the resurgence of COVID-19 in the United States and Europe sparked Monday’s sell-off. The next few days will show whether it was only a blip or the start of a major correction.

When all the indexes pull back no stock is safe but right now I think financials and, to a lesser extent, resources are good places to be.

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