Inflation’s A-Comin’, But This Isn’t A 1970s Redux

In recent months, the topic of broad-based price increases for goods and services, otherwise known as inflation, has divided political opinion and piqued the interest of many of those following the conversation in the media. Some prominent economists argue that the U.S. government’s unprecedented fiscal stimulus risks overheating the economy and sparking inflation. Others, including powerful policymakers atop the Federal Reserve and Treasury Department, expect inflation to spike at various points this year, but argue these increases will be transitory – in part the result of so-called “base effects” that reflect year-over-year growth from unusually weak price data when the economy ground to a halt in the initial wave of COVID-19. 

The most common measure of inflation, the Bureau of Labor Statistics’ Consumer Price Index for All Urban Consumers, posted a 2.6 percent increase year-over-year in March. Gasoline prices were among the most significant constituents pulling this index upward, increasing by 22.5 percent. However, as Neil Irwin explains in The Upshot, some of this increase is indeed due to base effects, but some is attributable to unbalanced supply and demand for oil products. Grocery prices are also increasing, but the index also includes constituent prices that have fallen over the last 12 months, most notably airfare, tickets to sporting events, and hotel rates. As the vaccinated share of the population rises and travel increases, these prices surely will rise as well, but how durable should we expect these changes to be?

As they always do, opinions vary. most of the managers we cover tend to align with the Fed’s view that inflation is likely to be volatile this year, yet mostly tame for the foreseeable future. Shortages of shipping containers, microchips, and restaurant workers will likely combine with base effects to produce unusual top-line inflation figures in the coming months as demand increases and weak data points roll off. But, policymakers have clearly indicated that they plan to look through these blips after years of sub-target price increases. 

While booming growth and the plans of an ambitious Biden administration present some risk of higher and more sustained inflation, the dominant view at present is that we are not in serious danger of 1970s-style runaway price increases.

The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this brochure is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon and risk tolerance. Past performance is not indicative of future results. This material is not meant as a recommendation or endorsement of any specific security or strategy. Information has been obtained from sources believed to be reliable, however, Envestnet | PMC cannot guarantee the accuracy of the information provided. The information, analysis and opinions expressed herein reflect our judgment as of the date of writing and are subject to change at any time without notice. An individual’s situation may vary; therefore, the information provided above should be relied upon only when coordinated with individual professional advice. Reliance upon any information is at the individual’s sole discretion. Diversification does not guarantee profit or protect against loss in declining markets. 
FOR INVESTMENT PROFESSIONAL USE ONLY © 2021 Envestnet. All rights reserved.