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 U.S. Bureau of Labor Statistics (11/10/21) — Consumer Price Index – October 2021
- DFA Returns 2.0 – Consumer Price Index (1/1/2010 -12/31/2019)
- The Wall Street Journal (11/9/21) — Thanksgiving dinner staples are low in stock thanks to supply-chain issues
- The U.S. Bureau of Labor Statistics (10/8/21) — Current employment statistics highlights
- Trading Economics (12/3/21) — United States inflation rate
- CNBC (12/1/21) — U.S. 10 Year Treasury
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.
PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971