March 11, 2021
The Inflation Genie
Phil Albitz, CFP®
It’s March already; the days might crawl but the months and the years fly. At this time last year, the markets were in the midst of a swift and steady crash. The stock market dropped 35% in a matter of weeks. Now, a year later, the stock market is near a high level but it is fibrillating again.
This time, interest rates and inflation scares are front and center to the volatility. Interest rates on the 10 year treasury jumped from under 1% to 1.6% recently. It doesn’t seem like much does it? 60 basis points, nothing right? The reality is that it is a huge move in the bond market and it has consequences. So why are rates jumping on the 10 year? I think it has to do with several issues, not the least of which being the large stimulus packages the government has set forth to battle the economic malaise caused by the pandemic. That’s a lot of money printing, or quantitative easing as it is being called. Unfortunately, the bond market sees this latest stimulus package as excessive and potentially inflationary.
You know if interest rates are rising because the economy is doing well, that is generally a good thing. But when rates rise because treasury auctions don’t bring in buyers, or that there is an expectation that the Fed will quantitatively ease too long and later will be forced to slam on the brakes, then that isn’t beneficial to the economy and it creates worry. You are seeing how the stock market is reacting to this scenario. That and the fact that some stock prices got ridiculously over valued.
Inflation is a general rise in prices and loss of purchasing power. I know that is a simple explanation but it works. Books have been written about the causes of inflation so there is no need to try to explain it because I not even sure I could. But I do know when I see prices go up. We used to measure inflation via the price of a postage stamp. In 1975, it cost a dime to mail a letter. Today, most people don’t even know what it costs because of the forever stamp. Well, it costs 55 cents. Prices have gone up 5 ½ times since 1975. That’s inflation. And to digress, 55 cents to hand deliver a letter across town or from here to New York is a pretty good deal, don’t you think?
Realistically, we are already seeing inflation: asset inflation. Stocks are high, real estate is high, copper is high, lumber is high, and oil is over $60/barrel! It wasn’t too long ago that oil was around $30, after going negative for a couple of days. The Federal Reserve wants at least 2% inflation. Now, their methods of calculating the personal consumption expenditures index (which is kind of a surrogate for inflation) has been muddied by the pandemic due to lockdowns, change in consumer spending patterns, and businesses shuttering. That probably throws their calculations off a bit. They make adjustments.
In 1979 through 1981, the inflation rate in the US was over 10%. Many of you will remember that and many of you won’t. When we finally come out of this pandemic, you have to believe consumption expenditures will increase, maybe by a lot. And maybe that inflation genie might be tough to put back into the bottle. Right now, Federal Reserve Chairman Jay Powell says he’s not too worried about inflation. Too bad that the market is saying something completely different. I know who I choose to listen to.
Anyway, we’ll get through this. As one of our clients said recently, “Stay calm and carry on.” We will. Until next time, I’m Phil Albitz. Thanks for watching.