After my BrandSource Presentation on the state of the economy on
March 10th, my inbox filled up from friends challenging my predictions about inflation. Here is my response.
Inflation is never an easy topic to present or even to understand. I have spent years since my college days as an economics major reading about the topic and there are still dozens of theories I don’t understand. Inflation on the surface is easy, prices rise when there is too much money chasing too few goods, it is the old supply and demand equation that we use when trying to understand the future of our economy. On the other hand, inflation is like chasing the corona virus, through all it mutations, just when you think it is controlled, it breaks out in another form.
When Covid 19 rocked the appliance supply chains last year, supply constraintsforced many wholesalers and retailers to raise prices but that didn’t deter buyers who kept arriving in your stores with cash. We had high levels of demand and a massive back order situation at the same time. That is classic pattern for inflation and results in a rise in prices. It happened across our industry from appliances, to electronics to furniture.
Now economists, investors and the bond markets are concerned that the $1.9 trillion stimulus package could spur a challenging cycle of rising prices across the U.S. economy. Prices for homes last year were up 10.2%, lumber was up 112%, used car prices were up 17%, oil, copper and silver were all up in the past 12 months. So far, the sharp increases in these pandemic-popular items have been offset by lower clothing costs, miles driven has declined, restaurant visits are off, and most of us are not attending concerts or sporting events.
Now, as$1,400 stimulus checks begin to arrive in Americans’ bank accounts this week, some fear that too much cashcould overstimulate the economy altogetherand trigger the kind of inflation the United States hasn’t seen since the late 1970’s.
It is important to keep in mind that Fed Chair JeromeH. Powell, who has only two mandates, full employment and guarding against excessive inflation, said recently that “the economy can absorb all that money without suffering a hard-to-control bout of inflation.”
It’s a gamble, we are betting the American economy can quickly return to full strength before the economy overheats and the Federal Reserve has to raise interest rates. That is a scenario that caused the double dip recessions in 1980 and 1981. But today we have 10 million Americans still unemployed and millions more underemployed, that is normally a check on inflation.
As I said in my presentation on March 10, 2021, the consumer price index, known as CPI, hasn’t hit the Fed’s targeted rate of 2% in the past decade. I am not naïve enough to think that inflation can’t move above this level but Powell said there is no reason to expect prices to spiral out of control. Jerome Powell is the only person in America that has the levers to actually slow down a major escalation in inflation.
If however inflation reared its ugly head and took off, the Fed would tighten monetary policy and while I don’t think this is ideal, it would hold back prices. I am predicting an extraordinary expansion in the economy in 2021, Bond yields as I indicated in my presentation are up to their highest levels in a year so yes you will see inflation but once we average it over the next twelve months it won’t surpass 2%.
Powell has assured all Americans that the Fed won’t raise rates until there’s substantial progress in the labor market and inflation is on track to meet and exceed the Fed’s 2 percent target. That is good enough for me.