Inflation concerns have been bubbling for some time. Those fears were realized in the April inflation report that shows the highest monthly core CPI numbers in my lifetime.
Why is inflation spiking? Multiple stimulus bills have added trillions in surplus cash to Americans’ bank accounts (demand). Meanwhile, COVID shutdowns disrupted supply. A surplus of funds pursuing fewer goods is a formula for rising prices.
Only making matters worse, workers are slow to return to their previous jobs. The combination of fear of returning to the workplace, obstacles such as childcare needs, and generous unemployment benefits have kept people at home. The US has a record 8.12 million job openings, and the April jobs reports showed over 700,000 fewer jobs filled than expected. We cannot meet the demand for goods until workers return to their jobs. Employers must pay above-market wages to compete with high unemployment income, and they pass along the costs to consumers. The combination of less goods and higher wages puts significant pressure on prices.
Governors, the President, and the Federal Reserve System need to educate the public of three essential truths:
- Cost will continue to rise until Americans return to work.
- We cannot afford to pay generous unemployment benefits indefinitely. We are already incurring trillions of dollars of debt due to COVID.
- It is safe to return to work. The probability of a vaccinated, working-age individual taking the proper precautions being hospitalized with or dying from COVID is very low. This may seem obvious to some, but studies show that most Americans misunderstand the risks of COVID.
Investors should not panic. The Fed has stated, and many economists agree, that inflation will likely be short term. I have not seen any credible voices warning about Carter-era inflation levels on the horizon. The market seems to agree. The bond market will typically sell off (resulting in higher interest rates) when long-term inflation is a concern. While interest rates have jumped over the last six months, they have plateaued at a low level.
Want to learn more about stimulus, inflation, and interest rates? I cover this topic in more detail in a recent radio interview.
As always, the advisors at JMA are here to help if you have questions.