Lately there’ve been a lot of headlines about rising inflation. As of the end of November 2021, the annualized Consumer Price Index-Urban was 6.8%.1 We already know this as we are seeing it in higher gas, grocery, housing, and other price increases. With prices going up, what does that mean for the economy and the stock market?
Before we can answer those questions, we need to answer these two questions: 1) How bad is inflation? and 2) How long with it last?
How bad is inflation?
This is the highest that inflation has been in decades. You’d have to go all the way back to the early 1990s to see inflation at this level. So, it sounds pretty bad, right? –Not necessarily. When one calculates the change in anything, there is a starting point and an ending point. If the starting point was unusually high, you might be thinking, “Holy cow. Inflation was already high and now it’s jumping to another record level.” Conversely, if the starting point was unusually low, you might be thinking, “Well, we’re kinda getting back to where we were in the beginning with a little extra added.” We believe that the situation is more like the latter. Here’s why.
Until recently, inflation had been running at below average levels for several decades. Then COVID hit and large numbers of workers initially stopped driving to work which meant a lot less gasoline was being pumped into cars and trucks. Gas prices fell making driving a bargain. Now more workers are returning to the office and many consumers are resuming old travel and vacation patterns. This has contributed to a surge in gas prices from a year ago. As of 12/10/21 the average cost of a gallon of gas nationwide was $3.34; a year ago it was just $2.16 a gallon.2
While higher gas prices are not great, it is not quite as bad given that we were starting from a pretty low level a year ago.
How long will high inflation last?
Perhaps the biggest question is “How long will it last?” This question is on the minds of consumers, economists and investors. Consumers have a tendency to over-estimate inflation which is no surprise since they are seeing higher prices every day. In addition, fears of higher inflation can be a self-fulfilling prophecy. If consumers believe inflation will persist, they may demand higher wages which means the costs of producing goods and services goes up which means companies may have to raise prices—and the cycle begins to feed on itself.
We are long way from that self-perpetuating cycle but it is always a risk. The longer inflation remains high, the greater the possibility that higher inflation will become “built in” to the economy.
There are several reasons for accelerating inflation but the biggest one in our opinion is COVID. This life-changing global event has caused a major shift in buying patterns across many industries resulting in well-publicized supply chain problems. But these changes are largely one-time events that have been compressed into a very short period. We believe the supply-chain issues eventually will subside.
Longer term, we believe the issues of slowing economic productivity will return as more and more Baby Boomers retire from the workforce. In fact, those retirements appear to be accelerating during COVID. As more people retire, fewer people are working. And fewer workers can mean reduced productivity and economic output. Lower economic output can mean reduced inflationary pressures.
That’s a lot of things that are dependent on one another. And we know that accurately predicting the economy is hard, at best.
Let’s see where we are six or 12 months from now. For inflation to become a major destructive force for investors, it is going to have to last a lot longer. We shall see and we’ll be watching.
If you have questions about inflation and how it may affect your investments, give us a call, we’re here to help. You can schedule a quick call with me by clicking HERE.
Lyman H. Jackson Lyman@PlanWithFPS.com
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1 Source: U.S. Bureau of Labor Statistics, published 12/10/2021, for all urban consumers on a seasonally adjusted basis. https://www.bls.gov/cpi/
2 Source: J.P. Morgan Asset Management and WTI, as reported in Market Insights Weekly Market Recap dated 12/13/2021
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