From economists to the man on the street, we now have concerns over a rapid increase in inflation. Those of us who lived through the 1970’s and early 1980’s remember how America suffered from stagflation, which is characterized by slow economic growth and relatively high unemployment.  Consumer prices skyrocketed 13% in 1979 and 13% in 1980. To slow the economy’s growth and shrink inflation, former Federal Reserve Chairman Paul Volcker raised the federal funds rate to a record 20% in March 1980. Unemployment in 1980 reached 7.5%.

For 2021, economists expect inflation to approach 2.3%. Not so bad? However, “the proverbial man in the street” is becoming nervous about inflation. Consumers expect inflation to rise to 3.3%, the highest level in six years. Citibank economist Veronica Clark said, “Price pressures have been building in the U.S. for the past five months, as fiscal-relief packages supported household income and business investment picked up.”

The Commerce Department reported that U.S. consumer spending rose 10% from the previous year. The burst in demand has

  • Created a sharp increase in commodity prices
  • Produced severe backlogs of ships carrying tens of thousands of containers
  • Created long delays in the ability to unload freight

Data firm IHS Markit reported the most severe supply disruptions since it started a national survey in 2007. IHS wrote, “firms reported slower output growth due to a lack of raw materials to fulfill new orders.”

The auto industry has suffered from acute shortages in semiconductors. In response, manufacturers have cut back on production. U.S. auto dealerships have a limited supply of trucks and cars because of a parts shortage that has interfered with production. As a consequence, buyers pay more, wait longer and have fewer models from which to choose.

The prevailing question is whether the expected wave of inflation will be modest or a dramatic flood that will cause our central bank to rapidly increase interest rates. Current low interest rates have fueled the stock market to new highs, increased housing prices nationwide (10% year-over-year) and raised commodity prices.

Federal Reserve Chairman Jerome Powell told lawmakers, “There will be a little bit slower growth and maybe some modest upward pressure on prices. But that should be something that is temporary.”

The Federal Reserve has a dual mandate: (1) foster maximum employment and (2) maintain price stability. Our central bank has interpreted maintaining price stability as keeping the inflation growth rate about 2% a year.

Although an increase in consumer prices could prompt the Fed to raise rates, most economists expect the Fed to not react to pricing pressures created by recent supply-chain disruptions.

Inflation raises the financial stress or those of us who are retired. These are questions one needs to ask:

  • Will my cash flow continue to support my family if prices rise?
  • How much less purchasing power will one experience?
  • Should I purchase more equity assets with the prospect of rising prices?

Ernest Hemingway ably summed up my philosophy:

“The first panacea for a mismanaged nation is inflation of the currency, the second is war. Both bring temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.”

During January 2021, year-over-year (YOY) growth in the money supply hit an all-time high of 38.6%. Increasing the money supply will cause inflation!

Americans concern about inflation is well founded. To paraphrase the Farmers Insurance ad, “They know a thing or two, because they have seen a thing or two.”

Originally published in the Sarasota Herald-Tribune