The U.S. Consumer Price Index (CPI) rose 7.9% year-over-year in February 2022 to its highest level since 1982. The core inflation rose 6.4% from the year-ago value last month to reach 40-year highs due to unprecedented federal spending, continued supply chain bottlenecks, and global trade disruptions. To combat the skyrocketing inflation rates, the Federal Reserve hiked the benchmark federal funds rate by 25 basis points on March 16, marking the first rate hike since December 2018. The Fed also announced its plans to raise the benchmark rate six more times this year and three additional times in 2023.
The equity markets tend to have a bearish response to interest rate hikes, as borrowing costs eat away at the profit margins and shareholder returns. However, basic material stocks typically depict resiliency, as these companies pass on the higher costs to consumers. Moreover, as the commodity markets are volatile due to various import embargoes on Russia, basic materials companies are benefiting from the surging commodity prices. Also, the resumption of industrial and manufacturing activities following the pandemic-driven disruptions and the passage of the landmark $1.2 trillion infrastructure bill is expected to boost basic materials prices further in the near term.
