By SJS Investment Services Chief Investment Officer Tom Kelly, CFA.
As the summer vacations and barbeques kick back into full swing, one conversation topic continues to rise to the top – inflation. Thankfully for many of us, gone are the days of masks, social-distancing, and awkward elbow bumps. The new “fear” is now, “Are things in the economy too good?” What a difference a year makes!
In last quarter’s SJS Outlook, our headline piece asked, “Inflation: Necessity or Risk? And What Should We Do?” Since then, inflation has continued to rise, as we’ve seen year-over-year inflation rates come in at 4.9% in May 2021 and 5.3% in June 2021, leading to continued questions and worries of “hyperinflation.”[1] However, before worrying too much about runaway prices and the inability to pay the rising costs, we believe it’s important to look at a few underlying factors.
As I mentioned earlier, what a difference a year makes. If you think back to all the uncertainty, and therefore lack of spending, that existed in Spring 2020, you would not be surprised to know that inflation was falling and near zero at this point last year. The year-over-year inflation numbers, which make the headlines, look a bit magnified because of where we were last year. When looking at prices compared to “pre-pandemic” levels, by observing annualized inflation over the last two years, inflation was only 3.0% in June 2021.[1]
“Consumer Price Index for All Urban Consumers: All Items in U.S. City Average”. U.S. Bureau of Labor Statistics, June 2021, fred.stlouisfed.org.
Additionally, when breaking down some of the components of inflation, indications point to some of the main causes of the recent rise as more transitory vs. pervasive. As of June 2021, areas such as airline fares (up 25% from a year ago) and used cars & trucks (up 45% from a year ago, due largely to a chip shortage) suggest that pent-up demand and temporary supply chain bottlenecks will lead to the dramatic rises being short-lived rather than enduring.[2][3]
We welcome the continued growth of the economy and potential of increased inflation as opposed to the alternate reality of stagnation and weak economy. Could inflation become a major problem? Certainly. Do we think inflation is a major problem right now? Probably not. Should you make drastic moves to ward it off? Not prudent in our opinion.
As Mark Twain purportedly said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” We continue to be humble about what we don’t know – the direction of inflation and corresponding market movements included – and focus on what we can control: designing portfolios to help you achieve your financial goals and putting you first. All the time. Every time.
Important Disclosure Information & Sources:
[1] “Consumer Price Index for All Urban Consumers: All Items in U.S. City Average”. U.S. Bureau of Labor Statistics, June 2021, fred.stlouisfed.org. US Bureau of Labor Statistics Consumer Price Index All Urban Seasonally Adjusted is a measure of the average monthly change in the price for goods and services paid by urban consumers between any two time periods. It can also represent the buying habits of urban consumers. This particular index includes roughly 88 percent of the total population, accounting for wage earners, clerical workers, technical workers, self-employed, short-term workers, unemployed, retirees, and those not in the labor force.
[2] “Consumer Price Index for All Urban Consumers: Airline Fares in U.S. City Average“. U.S. Bureau of Labor Statistics, June 2021, fred.stlouisfed.org.
[3] “Consumer Price Index for All Urban Consumers: Used Cars and Trucks in U.S. City Average“. U.S. Bureau of Labor Statistics, June 2021, fred.stlouisfed.org.
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