By: Tim Courtney, Chief Investment Officer
The latest data from The U.S. Bureau of Labor Statistics shows the most recent inflation level at 6.2%.1 This reading marks the largest 12-month surge in more than 30 years and has made headlines not only because of its high level but also because it has been such a departure from our experience over the last decade. During the 2010s the U.S. Consumer Price Index (CPI) averaged 1.75% a year and both consumers and the market became accustomed to this level.2
There are many variables at play currently, many of which have also had their share of headlines. All have affected supply and demand in some way. Here are a few of the main drivers.
Supply Chain Disruptions: We’ve all become familiar with this over the last year. Certain items are out of stock, delivery times go from days to months, retailers resort to rationing. Even some Thanksgiving staples were running short.3 The world ran on extremely efficient and lean, just-in-time inventory, but this system stumbled following the shut-downs. Companies are reevaluating their chains of suppliers but many have noted it may take longer for them to get a handle on it and see additional price increases coming. This will eventually fade but for now, it continues to push prices higher.
The Great Resignation: According to data from The U.S. Bureau of Labor Statistics, there were 5 million fewer workers in September 2021 than there were in February 2020.4 Thankfully the current level of production has roughly met the level of production in the country just before the pandemic. This is a good sign of increased efficiency from the workers that remain. However, there are many reports of workers becoming burned out and quitting, and companies are meaningfully increasing wages to retain their workforce. This is also making its way into prices.
Broad Basket of Policy Changes: The government’s main responses to the pandemic have been on the inflation side of the ledger. Stimulus and spending have pushed more money out the door and increased demand while production has largely stayed the same. Central banks’ purchases of mortgage bonds have dropped rates and fueled higher home prices which haven’t fully made their way into the CPI numbers yet. These policies are being argued and may begin to be moderated, but so far the inflation that policymakers said they wanted has been achieved and then some. 5
Outside of a brief period from August 2020 through March 2021 when interest rates moved higher to account for accelerating growth and prices, the bond market’s reaction to these developments has been silence. Most recently interest rates fell as a reaction to the latest COVID variant.6
This has created a very difficult environment for investors, where inflation is wicking away the purchasing power of many assets that investors need to hold for planning purposes or for risk management. As always, if you have any questions about how this may be affecting your assets please contact your Exencial advisor.
The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living. The CPI is one of the most frequently used statistics for identifying periods of inflation or deflation.
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