The Great Inflation Debate

May 14, 2021
By Tim Courtney, Chief Investment Officer

The big debate gripping markets today is inflation. While most agree we will see inflation above 2% in the next 12 months1, investors are divided on whether this a short-lived phenomenon or the beginning of a longer-term inflationary trend.

On its face, it seems like a world of finite resources along with a growing population would naturally produce inflation. This harkens back to the famous 1980 bet between biologist Paul Ehrlich and economist Julian Simon. Ehrlich, who believed population growth would lead to resource scarcity and ultimately unprecedented inflation, wagered that the prices of five commodities that he chose would increase over a 10-year period. Meanwhile, Simon argued the prices would go down due to ingenuity and adaptation. In the end, Simon won the bet — the prices of the commodities went down by an average of 50% between 1980-1990.2

Like Simon, some investors believe that supply chain innovation and the substitution of lower-cost solutions by producers and consumers will tamp down inflation. On the other hand, some are concerned about the longer-term ramifications of the COVID-19 pandemic, labor shortages as well as stimulus and Federal Reserve measures.

This debate continues and is fueled by the fact that we have no historical reference that compares to the current environment. Never before have we shut down large parts of the economy, dropped interest rates to virtually zero and reopened the economy several months later accompanied by massive spending and money creation. The most recent employment numbers have many concluding that labor shortages are being caused by would-be-workers instead opting for unemployment benefits. This has left companies with unfilled positions, lower customer service levels and rising labor costs.3

While it is far from certain how all of this will eventually work out, we would conclude that this is at least a potential heightened risk. The Bloomberg Commodity Index, which tracks prices for 23 raw materials, has already gained 18.6% since the start of 2021.4 Treasury inflation-protected securities (TIPS) have seen positive returns year-to-date5 while other bonds are negative.6 Companies are warning of labor shortages and finding they need to raise hourly wages considerably to attract and retain employees.7

With inflation here and potentially lasting longer than the Fed might like to see, holding excess cash may lead to purchasing power loss over the next several years. Many Americans have understandably been saving money at record rates due to pandemic-induced uncertainty and stimulus payments.8 However, stashing too much cash during a high inflationary period can significantly diminish purchasing power over time.9

While it’s difficult to predict the full impact of inflation, it is nonetheless a risk we are taking into consideration. We are mindful of this risk as we manage portfolios, and this also affects the way we analyze inflation-adjusted cash flow projections in our clients’ planning scenarios. If you have any questions about inflation, please contact your Exencial advisor.


1. Business Insider (5/12/21) – What is inflation and when you should really start worrying about it
2. NPR (1/2/14) – A bet, five metals and the future of the planet
3. The Wall Street Journal (5/6/21) – Millions are unemployed. Why can’t companies find workers?
4. Bloomberg (1/1/21 – 5/14/21) – Bloomberg Commodity Index
5. Yahoo! Finance (1/1/21 – 5/14/21) – iShares TIPS Bond ETF (TIP)
6. Yahoo! Finance (1/1/21 – 5/14/21) – iShares Core U.S. Aggregate Bond ETF (AGG)
7. Bloomberg (5/6/21) – ‘Job paradox’ baffles economists as U.S. employers see shortage
8. MarketWatch (4/30/21) – Americans have a few trillion in savings to keep the economy going strong
9. Business Insider (1/15/21) – Investing for inflation means choosing assets that keep pace with rising prices — here’s how to inflation hedge to protect your wealth

The Bloomberg Commodity Index (BCOM) is a broadly diversified commodity price index that tracks prices of futures contracts on physical commodities in the commodity markets. The index is designed to minimize concentration in any one commodity or sector. It currently has 23 commodity futures in six sectors. No one commodity can compose more than 15% of the index, no one commodity and its derived commodities can compose more than 25% of the index, and no sector can represent more than 33% of the index (as of the annual weightings of the components).

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