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A Brief Word on Inflation

By July 4, 2021July 9th, 2021No Comments

Originally sent as client communication 5/17/2021

 

The last few weeks have brought a wave of questions regarding whether inflation is rearing its ugly head, so let’s address this topic.

 

The Federal Reserve Chairman Jerome Powell said in late April, 2021, that the recovery is “uneven and far from complete.” Also, he commented that “Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.” Janet Yellen, the Treasury Secretary and former Federal Reserve Chairman said in early May, “I don’t think there’s going to be an inflationary problem, but if there is, the Fed can be counted on to address it.”

 

So if the experts, the ones whose job it is to address inflation, aren’t currently concerned, why do we hear so much about it in the media?

 

To see what’s going on, let me ask: are you ready to go out to dinner, get a haircut, fly to see the family or visit your favorite vacation spot? I’m guessing you are, as are hundreds of millions of other Americans at this moment as the country opens up to economic activity. For over a year pent up demand has been building to go out and spend. In the interim Americans have been working on their homes (thus the rise in lumber and other construction costs). Now they want to spend money on entertainment and travel.

 

What does all that demand focused on very narrow niches in the economy do to prices? It pushes them up, naturally. But what will happen several months or a year from now when we approach a more normal economy? Much of the demand we see in narrow pockets of the economy will cool, appetites will have been somewhat satiated and we won’t see this tremendous uptick.

 

This is part of why both Powell and Yellen see inflation as transitory.

 

But what about the most recent inflation number showing higher than expected inflation? Consider one of the components that led prices up, used cars. From Bloomberg, “An unprecedented surge in prices for used cars was the biggest contributor to the surprise jump in US inflation last month.” The jump in used car prices, “accounted for more than a third of the 0.8% increase in the consumer price index…” https://www.bloomberg.com/news/articles/2021-05-12/record-surge-in-used-car-prices-is-key-culprit-in-inflation-jump

 

Used car prices were up 10% month over month. Why were used car prices up? Because of a shortage in microchips worldwide. Why would a shortage of microchips lead to a rise in used car prices?

 

Great question. It’s because automakers use microchips in the building of new cars and thus have been unable to keep up with demand. Once the microchip shortage eases (which it will), new cars will again become readily available, leading to used car demand dropping. Again, a transitory inflationary issue.

 

Consumer Reports said this on May 14, 2021, “A month ago, the relatively high price of used cars was pushing many car buyers toward new cars, but now that a global semiconductor shortage has prompted many automakers to slow or pause production, new cars are more scarce.” And just to add to this problem surrounding car prices, consider this, “Now even rental car companies—many of which sold off vehicles during the nadir of the pandemic last year when car rentals and travel in general plummeted—are buying used cars just to bring their fleets back in line with rising demand.” https://www.consumerreports.org/buying-a-car/when-to-buy-a-used-car/

 

Is this a permanent problem? Or a temporary one?

 

I propose it’s temporary.

 

Inflation is here, but likely not to stay.