Inflation

Inflation Spikes For Now

Inflation peaked to a 20-year high this last month with the Consumer Price Index (CPI) hitting an adjusted rate of over 6%. You know what inflation feels like because everything is more expensive including cars, gas, food, housing, pharmaceuticals, etc.
 
There is some concern that inflation is a runaway train and fears that we will likely see a return to hyperinflation that we saw in the 70s. As I’ve shared before, I think this is unlikely as OPEC has less control over the US economy compared to the 1970s when they were essentially an energy monopoly. Gratefully, the United States is now less dependent on OPEC oil.
 
Transitory

Some economists think that inflation is transitory. Transitory is a fancy word for temporary. If you look at current inflation numbers, they are rising as the economy reopens. This is not unexpected as a snapback in prices and demand is expected as people begin to emerge from their Covid cocoon.

We agree that inflation, while rising, is more of a transitory issue as the economy reopens.

Supply Chain 

Another factor in inflation is the supply chain challenges we are currently facing. Imports around the country in cargo ships are sitting full of materials that cannot be unloaded because of labor shortages. Additionally, the global supply chain has been impacted by a variety of factors and we believe this will continue for at least the next 12 months. Supply chain concerns are real.

Our View

We believe inflation will moderate sometime next year when anticipated tax increases kick-in, supply chains become less impacted, and more normalized spending becomes the standard practice for consumers and businesses. Inflation is not going to be below 2% in our view. Our target rate we are estimating is approximately 3% (which is half of what was recently reported). 

DWM has positioned fixed income portfolios on the assumption that interest rates will rise and that has been a good decision. Our equity assets are also positioned on the assumption that inflation will continue at higher than previous levels. Every equity position has been analyzed based on our view on how inflation will impact corporate earnings and eventually stock prices. We will continue to adjust as necessary.

Headlines 

Try not to be overly impacted by the emotional headlines that suggest inflation is a huge catastrophic problem. Remember that historically, inflation rates between 2 ½ and 3 ½% have been the norm and that equity assets have tended to be just fine in this inflationary range. 
 
We will continue to monitor the numbers as well as the action the federal reserve will take based on CPI and PPI (Producer Price Index) data. Of course, we will adjust as needed.

Disclosures: 

Inflation is the rate at which the value of a currency is falling and, consequently, the general level of prices for goods and services is rising.