A Four-Letter Word Called Inflation
Most have heard the question, “Is too much of a good thing, still a good thing?” Early in the year, Treasury bond yields were rising in reaction to congressional generosity. You know, trillions and trillions of dollars of stimulus cash being pumped into the economy.
The cash has aided the economic recovery, and stocks have reacted favorably. Today, however, too much money is generating a new concern: inflation.
The core Consumer Price Index (CPI), which excludes food and energy, rose at its fastest monthly pace in 40 years, up 0.9% in April see Figure 1. Add food and energy into the mix and the CPI increased a worrisome 0.8%.
What the consumer does is important because consumer outlays account for nearly 70% of GDP, according to U.S. Bureau of Economic Analysis (BEA) data.
Admittedly, inflation worries have popped up before. “Inflation Rears Its Ugly Head Once Again” was a March 2008 Wall Street Journal headline.
Today, economists are debating whether the recent flare-up is temporary and tied to the reopening of the economy and pent-up demand or something more ominous that would eventually force the Federal Reserve to jack up interest rates.
Fed officials have repeatedly insisted that today’s jump in prices is “transitory,” their preferred word of choice. What does transitory mean? It simply means temporary.
That may turn out to be the case, but let’s dig a little bit deeper.
Policymakers are finding out that it is easier to fuel the demand side of the economy (consumers and businesses buying goods) than get the productive side of the economy, which generates that supply of goods, back on its feet.
Using a very broad overview, Figure 2 helps explain what’s happening. The demand for goods has surged thanks largely to fiscal stimulus, but the production of goods has lagged badly.
Imports have made up some of the difference, hitting a record high in March per U.S. Census data. Still, a tight supply of some goods is pushing up prices. It’s the classic case of supply and demand as the economy reopens.
Recent headlines shine a light on the problem. A May 13th story in the Wall Street Journal, “Empty Lots, Angry Customers: Semiconductor Crisis(Shortages) Throws Wrench into Car Business”, sums up what’s happening in the auto industry.
Or here is another look from a May 11th CNBC feature: “U.S. Faces Major Shortages in Everything from Labor to Semiconductors, Lumber, and Packaging Material”.
Problems are especially acute in housing.
The National Association of Homebuilders said that lumber shortages are leading to skyrocketing lumber prices, adding an average of $36,000 to the cost of new home in one year.
Where might we be headed? Congress is debating infrastructure and big new spending bills. There is still plenty of fuel in the tank to support consumer spending, and the Fed insists its easy money policy won’t be changed anytime soon.
Further, it is unknown when supply-side bottlenecks might clear or whether labor shortages may fuel wage increases that get tacked on to retail prices.
Yet, disinflationary demographic trends that predate the Covid crisis remain in place. The same could be said of globalization, though less so than in recent years. Plus, labor unions no longer have the power to exact inflationary wage hikes as they did in the 1970s.
Besides, a burdensome rise in inflation would probably be met by a quicker response from the Fed than what we saw a generation ago.
Inflation is not a four-letter word, but it might as well be. A repeat of the1970s is an unwanted outcome. However, the low inflation of the last decade is unlikely to be matched over the medium term.
If you have any questions or want to discuss any other matters, please feel free to reach out to your advisor.
1 The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly. Past performance does not guarantee future results.
2 The NASDAQ Composite is an unmanaged index of companies which cannot be invested into directly. Past performance does not guarantee future results.
3 The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly. Past performance does not guarantee future results.
4 The Global Dow is an unmanaged index composed of stocks of 150 top companies. It cannot be invested into directly. Past performance does not guarantee future results.
5 CME Group front-month contract; Prices can and do vary; past performance does not guarantee future results.
6 CME Group continuous contract; Prices can and do vary; past performance does not guarantee future results.
It is important that you do not use this e-mail to request or authorize the purchase or sale of any security or commodity, or to request any other transactions. Any such request, orders or instructions will not be accepted and will not be processed.
All items discussed in this report are for informational purposes only, are not advice of any kind, and are not intended as a solicitation to buy, hold, or sell any securities. Nothing contained herein constitutes tax, legal, insurance, or investment advice. Please consult the appropriate professional regarding your individual circumstance.
Stocks and bonds and commodities are not FDIC insured and can fall in value, and any investment information, securities and commodities mentioned in this report may not be suitable for everyone.
U.S. Treasury bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term (less than one year) obligations of the U.S. government.
Past performance is not a guarantee of future results.
Different investments involve different degrees of risk, and there can be no assurance that the future performance of any investment, security, commodity or investment strategy that is referenced will be profitable or be suitable for your portfolio.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.
The information contained is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.
Before making any investments or making any type of investment decision, please consult with your financial advisor and determine how a security may fit into your investment portfolio, how a decision may affect your financial position and how it may impact your financial goals.
All opinions are subject to change without notice in response to changing market and/or economic conditions.
All rights reserved