Supply Shocks Fuel Central Bank Concerns Over Persistent Inflation

Central banks are worried about recurring supply shocks that may keep inflation above target. This is a major concern for investors, as it could lead to more periods where bond and stock prices fall together.

The traditional role of bonds as a hedge is being eroded, with the five-year rolling correlation recently turning positive for the first time in over two decades.

Supply shocks are becoming more frequent, but the inflationary impact may be minimal. For example, the semiconductor shortage is pushing up prices of some consumer electricals, but this accounts for only 1.3% of the US inflation basket.

The same goes for AI's hunger for electricity, which may not have a significant impact on national inflation due to localized power sourcing and low weight in the CPI basket.