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Inflation Outlook: Why Inflation is Rising and an Outlook on the Months Ahead

Inflation Outlook: Why Inflation is Rising and an Outlook on the Months Ahead

June 15, 2021

As our nation continues to recover from the effects of COVID-19, one economic trend has been capturing news attention as of late. Consumer prices are rising amidst economic recovery. Inflation can be a scary word, especially for investors and retirees. A recent survey shows that 63% of investors are more interested in protecting their financial assets and planning for uncertainty in the future than anything else.1 When they hear rising inflation, it’s code for “prices are going up, but my income may stay the same.” Here are the facts about the rise in consumer prices, the forces behind the increase, and how to prepare for the coming months. 

Inflation On The Rise

At its June meeting, the Federal Reserve confirmed what many of us have suspected for some time: prices are rising. In fact, prices are climbing faster than many expected. In response, the Fed raised its inflation expectation to 3.4%, up from its March projection of 2.4%, effectively raising its inflation expectation by 42%.2

Over Memorial Day weekend, gasoline prices hit a 7 year high (the highest for this holiday weekend since 2014.)  Used car and truck prices, which are seen as a key inflation indicator, surged 21%, including a 10% increase in April alone.3 The jump in new and used vehicle prices is partially due to supply chain problems that have caused a shortage of semiconductors. The lack of computer chips has limited the production of new cars. But higher prices were evident in a wide variety of categories and other factors are driving up consumer prices. 

Factors Pushing Inflation Up

Labor Shortage

Employment numbers were lower than expected in both April and May, and many millions remain out of work. Some economists attribute this to the unemployment payments and stimulus checks for making people less likely to take low-paying fast food and retail jobs again. There is also just a lag in hiring and more people will return to work as they get vaccinated. Fed Chair Jerome Powell has said repeatedly that he is focused on getting back to full employment and that he won’t be swayed by temporary rises in inflation. 

Demand Outweighs Supply

Increased prices for many goods and services are the result of bottlenecks and strong consumer demand as the economy comes roaring back. Government officials and many economists have said much of the jump is likely to fade with time as the economy gets past a reopening bounce and supply catches up. The economy is reopening from a global pandemic shut down for the first time, and critical materials are in short supply as manufacturers try to ramp up production. Many households are also eager to spend after multiple stimulus checks and months in lockdown, and that has been putting pressure on certain goods.

Will The Trend Continue

With upward trending prices, an important question arises - Is the Federal Reserve ahead or behind in its monetary policy regarding inflation? Federal Reserve Chair Jerome Powell has said it could be a mistake to see inflation as a guest long overstaying its welcome. He said at the June meeting that he believes that inflation will be transitory. “One-time increases in prices are likely to only have transitory effects on inflation,” Powell said. He added, “It will take some time before we see substantial further progress.”Inflation is expected to level off once unemployment benefits stop and people begin returning to work. 

There tends to be a general expectation that inflation will settle down later this year around the 2% range targeted by the central bank. Inflation at that level would be no big deal. Long-term investors with well-diversified portfolios of stocks and bonds shouldn't worry too much about the current media buzz surrounding inflation.

Remember that you are in good hands. With reports of rising prices and talks on inflation, it can be difficult to know how concerned one should be. We advise you not to panic but don't ignore inflation either. In regards to your portfolio, this is another case where focusing on your finances will likely be more beneficial than listening to the media buzz. If you have any questions or concerns, give us a call.

1., April 22, 2021

2. The Wall Street Journal, June 16, 2021

4. Wall Street Journal, June 1, 2021

5., April 28, 2021