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Inflation Worries?

Inflation Worries?

| June 14, 2021

Inflation Worries?

I was looking forward to getting to the nursery this spring to get some perennials and a tuff stuff mountain hydrangea for planting. But, I was a little sticker shocked that for only a few plants, I walked out of the nursery paying $150!

I decided to do a little "digging" and found that the price increases in 2021 are in part due to such high demand in 2020 since most states had deemed garden centers as essential coupled with more people spending time at home and beautifying their landscape. 1

The high demand in 2020 resulted in growers having to dip into their 2021 inventories which have caused shortages and hence higher prices. 1 This is an example of demand-pull inflation caused by strong consumer demand for a product or service.

So, how much inflation can the country afford before we’re in trouble?

Let’s discuss.

First, let’s get on the same page about some basics.

If you’ve noticed the price of a thing increasing over time (say, your favorite candy bar or the cost of college tuition), that’s inflation in action.

Economists use the broad increase (or decrease) in prices of goods and services across the country as a measure of economic health.

When inflation is stable and predictable, it’s a sign of a basically healthy, growing economy.

But, high inflation can quickly eat away at the purchasing power of your dollars, indicating that the economy might be overheated.

Deflation, or a decline in prices, can be a warning sign of a shrinking economy.

Recent data highlighted a surprise spike in inflation, indicating that prices increased faster than economists expected last month.2

Could this be a worrisome sign that the economy is overheated? Could $50 burgers be in our future?

Maybe.

On the other hand, could it be a temporary blip caused by the economy emerging from the pandemic-driven slowdown, complicated by supply chain issues?

Very possible.

Are the headlines catastrophizing?

They usually are.

Let’s review the data.

The Consumer Price Index (CPI), one of the major indices’ economists use to track inflation, showed a surprising spike in April, igniting fears of runaway inflation.

Core CPI (which excludes the highly volatile categories of energy and food) showed a 0.9% increase in April month-over-month and 3.0% year-over-year. That’s much higher than the expected 0.3% and 2.3%, respectively.2

However, digging a bit deeper, we see that just two categories of goods (used cars and transportation services) accounted for the vast majority of the surge.3

That suggests things like flights and train travel suddenly became more expensive after a year of rock-bottom prices.

Is that runaway inflation or the normalization of prices as the world reopens?

We can't tell from a single data point, but it's not unusual to see prices increase in sectors that experienced a severe slowdown last year.

And the jump in used car prices? Well, many folks are turning to the second-hand market right now, in part because new cars are caught up in global supply chain bottlenecks for things like semiconductors and raw materials.4

Inflation is something to keep an eye on, especially in a year when so many of the usual variables have been thrown into flux. An ongoing surge in prices could hurt our wallets as our dollars buy less over time.

However, a single monthly spike following a very weird period for the economy is not cause for alarm yet; we should prepare ourselves for more odd numbers coming out of different parts of the economy in the weeks and months to come.

Shortages of everything from ketchup to gasoline could lead to price increases and fluctuations as supply chains attempt to disentangle from pandemic disruptions.5

Should we expect markets to react to inflation (and other) headlines?

A negative market reaction is not surprising after weeks of strong performance. We should expect volatility ahead as we (and the economy) adjust to a post-pandemic world.

Bottom line: Expect the unexpected in 2021.

Our advice, focus on the things that you can control.

Following are few tips to consider if higher prices, whether temporary or long-term, seem to be burning a hole in your wallet:

  • Re-visit your projected expenses and review what is fixed and what is discretionary.
  • Evaluate if you can reduce some discretionary expenses for the time being.
  • If you are still working and saving for retirement, maybe it is a good time to ask for a raise.
  • If you are in retirement, work with us to evaluate the benefits of having treasury inflated protected securities in your portfolio which offer inflation protection.

1https://www.cnbc.com/2021/05/12/consumer-price-index-april-2021.html

2https://www.gardencentermag.com/article/2021-the-year-of-flexibility/

3https://www.chase.com/personal/investments/learning-and-insights/article/top-market-takeaway-05142021

4https://www.npr.org/2021/04/09/985860442/auto-industry-continues-to-struggle-with-supply-chain-issues

5https://www.cnn.com/2021/05/08/business/supply-chain-shortages-pandemic/index.html

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

Vision Capital Partners, Inc. (“VCP”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where VCP and its representatives are properly licensed or exempt from licensure.