Inflation: Should we be worried?

What is inflation and why is it a concern?  

Inflation is the rise in costs for products and services. Inflation is a concern when prices move up higher than wages, making things more costly. The Federal Reserve controls monetary policy. If The Fed jumps in too quickly, it will curb growth. If gone unrecognized, it can cause a recession and affect the value of the dollar. There is a lot of concern that the economy is running too hot, that it will spur too much inflation, and The Fed might be a wet blanket on the rally. We don’t think The Fed is going to do much of anything unless indicators force them to move faster than they have indicated they are willing to move.

  • The Fed changed its policy to focus on long-term inflation, saying they would let inflation run above 2%, since the last 15 years it has fallen below the 2% target. Even when inflation has been high, past Fed announcements have used the “transitory” excuse to keep rates low. 
  • In their order of concerns, The Fed has moved growth up on the list and also mentioned financial stability as a policy goal.
  • The Fed has explicitly said they are more concerned about risks to the downside.

Short-term inflation

Short-term inflation is related to a number of items, and many of them may, in fact, be transitory (look at me, I sound like a Fed chairman). The big conversation is around lumber and material costs. The cost of these items has been high, due to lack of supply from COVID (ie: not enough workers, trade flow, cost to transport, etc.).

What does transitory mean? Transitory inflation is the new buzzword around inflation. Essentially, it just means it is temporary, based upon circumstances that make it temporary. It should level back to normal, or a new normal, but will not remain this high forever. Demand will taper and/or supply will be back to higher levels, bringing supply and demand back to normal.

  • Year over year comparisons are going to show a big increase in prices, stoking the fears of inflation, but these comps are based on abnormally low numbers from the prior year.
  • We have supply constraints from the plant shutdowns and necessary rapid responses.
  • Stimulus checks have led to insane retail sales. Retail sales grew 9.8% in March - the average is 4.32% - that is CRAZY! If that happened every month, we would have over 100% annualized growth in retail sales!
  • With the expectation of strong sales and pricing power, we are seeing inventory builds.
  • Industrial production is missing expectations (1.4% versus 2.5%), further creating pricing power for companies while also having companies scramble for limited supplies. In these environments, we often see “double ordering”, where you order from two places, keep what comes first and cancel what is late. This leads to a boom-bust type of action in the prices of commodities and inputs.

Long-term inflation

Long-term inflation still appears to be low. One reason for this is the deflationary pressures from innovation, both reducing prices and making more current inventory obsolete.

  • Good deflation: Increased productivity from artificial intelligence, data mining, mobile capabilities, robotics, etc. Overall, it is about better technologies that provide more while using less.
  • Bad deflation: Something that is made obsolete by technology. A fax machine is a good example. How much would you pay for a fax machine? Probably not much, and most likely less than it costs to make.

What do we think?

Many of the best investments for the next five years go against common thought. Everyone thinks inflation is going to explode higher. We think inflation will stay within reason and that The Fed will not adjust its policies.

If you want to discuss these thoughts with us further, schedule an appointment by:

Calling: 973-554-1770


Texting:  862-217-5344

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