Our Expectations for Higher Inflation

A recent study showed that 87% of survey responders expressing concern about inflation. Is inflation something investors should worry about? Director of Research Jeff DeMaso discussed his inflation outlook in our recent webinar,* Inflation, Inoculation and Infrastructure: Defining the New Normal.

Please enjoy the excerpt below and click here for the full webinar replay to hear more. 

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Jeff DeMaso:

I’m going to talk about a common worry among investors, which is inflation. I think there’s good reason to be somewhat concerned about inflation. As I’ll get to in a moment, we do expect to see higher inflation, or at least higher levels of reported inflation, and what I want to try and do is put that into context because I think the media and the headlines do a pretty bad job about that.

The real inflation story is less dramatic and less worrisome than the headlines suggest. Higher inflation is coming. In fact, in some ways it’s already here. The most recent headline inflation number came in at 2.7% over the past year, but we knew that was coming and we know the higher numbers are coming, even before they get reported.

So, why is inflation going up so quickly? In part, it’s simply just due to math. A year ago, in March and April, when the economy was shut down, we had deflation. We had prices coming down. Prices were falling. And the way we report inflation is to compare today’s numbers to what the numbers were a year ago. So, the comparison today is going to look big because we’re comparing to a depressed level from a year ago. This is what’s called the base effect. If we assume a 0.2% per month inflation rate, and that’s about the average that we saw prior to the pandemic, even that modest level of inflation is going to give us a year-over-year inflation headline number of over 3.5%.

That sounds alarming, but the numbers are going to start coming down naturally as we move ahead, for that same base effect reason—those really depressed numbers that are making it look really high now are going to fall off the calculation and bring that year-over-year number down.

Now, to be fair, it’s not all just about the math. We are seeing some actual inflation in the system, and this is due to a growth problem: There is more demand than supply today. Remember, a year ago demand collapsed as we shut down the economy to slow the spread of COVID-19, and suppliers and producers and manufactures also shut down. Fast-forward to today and so far we’re seeing demand come back quicker than supply.

This is why you see backups at the ports, you see a shortage in computer chips, and there’s a lack of rental cars. All of that’s because demand has come back so quickly.

Now, these inflation factors should be temporary. As I said, the math kind of takes care of itself in the next couple of months, and then this idea of the supply/demand imbalance is going to right itself. Supply will come back online. Our expectation is that we’re going to see higher inflation for a period of time, but it should be short-lived, and we’re not expecting or predicting wild double-digit inflation that we saw back in the 1970s, early 1980s. So, if you’ve been hoarding gold coins in your basement, that might not be the best use of your money when it comes to investing.

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Click here for a replay of Inflation, Inoculation and Infrastructure: Defining the New Normal. Please contact us at (800) 492-6868 to learn more about comprehensive wealth management solutions.