It’s Easy to See How Prices Could Continue Rising for an Extended Period

North American markets today, Monday, viewed several hours before the 9:30 a.m. EST opening appear poised to start in negative territory with major American and Canadian indicators in the red at time of writing. However, the DOW is very slowly climbing and could turn positive during the morning. (That is certainly not assured.) The S&P 500 is also wavering

European markets are  already open at time of writing and major indicators there are shifting between red and green as investors and analysts await clarity on whether the British government will proceed with plans for the full repeal of pandemic restrictions on schedule on June 21.

Amongst precious metals the safe havens of gold and silver are down.

Amongst currencies the British pound sterling, Euro and Canadian dollar are basically flat against the American dollar although they were often up last week. This too, could conceivably shift during the morning.

Currency fluctuations are an advantage or disadvantage depending on an individual’s location.

Some central banks, such as the Bank of Canada, have begun to reduce their quantitative easing measures by reducing the quantity of government and corporate bonds in their monthly purchases, explains Gavin Graham, London-based financial analyst and media commentator. Meanwhile, the United States Federal Reserve has shown no sign of deviating from its easing policies, even though the Organization for Economic Development has forecast American gross domestic product will grow by 6.5% this year.

In fact, Friday’s jobs report seemingly eased fears that the Fed would cut back on monetary stimulus. “It keeps the pressure off the Fed and will enable them to keep their low interest rate policy in place longer, and take more of a wait and see attitude,” said Jack Ablin, chief investment officer at Cresset Capital Management in a Reuters report. “The opportunity to keep rates low is good news for risk takers,” he said.

Moreover, speaking at a G 7 news conference on Saturday, Treasury Secretary Janet Yellen urged other nations to continue spending and argued that inflation will rise but that the increase will be transitory.

The OECD also forecast that the gross domestic product in the United Kingdom will grow even faster, reaching 7%, partially because the UK economy shrank by 9% last year. Graham points out that both countries have had aggressive vaccination campaigns. Over 50% of Americans and 70% of Britons have received their first dose. These aggressive campaigns have meant that their economies have been able to reopen faster than the European Union and Japan where vaccinations have been slower.

Still, that reluctance to raise interest rates means that the American greenback has been sliding against virtually all other currencies, where investors are either receiving a higher interest rate, or see the likelihood of interest rates being raised sooner.

“The U.S. dollar trade weighted index is down almost 10% in the last year, and more than 15% against the Euro, the pound and the Chinese yuan,” Graham says. The Canadian dollar has just hit a 6-year high against the U.S. dollar, and the commodity backed Australian dollar is also at multi-year highs.

Whether the increase in inflation proves to be transitory remains to be seen but, in the meantime, the currency shifts will increase inflationary pressures in the U.S. as imports cost more in American dollar terms, and the U.S. trade deficit is increasing as its quicker recovery sucks in more imports. Furthermore, prices of many commodities, such as oil and gas, lumber, copper, nickel and other metals as well as microchips have all risen sharply in the last year, in many cases doubling or more.

Graham says that the rising cost of transport due to reduced flights, shortages of shipping and interruptions adds to the equation. “It’s easy to see how prices could continue rising for an extended period, especially as pent-up demand for goods and services returns as lockdowns are eased, “he explains.

As an example, the price of housing in the U.S., Canada and the UK has risen between 10% and 15% in the last year, and by much more in desirable areas such as smaller cities and outer suburbs with larger houses and more outdoor space.

“This has fed through into higher prices for building materials for new houses and for remodelling, not just timber, but wiring, plastics for piping, slates and many other commodities and products.,” he says.

Related: As the Smoke Clears, We Take Stock

Al Emid is a financial journalist broadcaster and author, His next book. The 2021 Emid Report on Volatility is scheduled for a Fall release.