The US economy is heating up with inflation trending up! I explain the factors that affect inflation and what this could mean for the near to medium term in the stock market and everyday consumer goods and services.
There’s been a lot of money printing (cue Jerome Powell) going on to try to help the American economy recover. This may be contributing to some inflation indicators going up fast such as the Consumer Price Index (CPI) increasing by 4.2% (year over year or YoY) in April 2021 and 5.0% in May 2021.
The US Federal Reserve (aka The Fed) isn’t going by CPI but is tracking inflation at the Personal Consumption Expenditure (PCE) Index rate.
What money printing (or quantitative easing or QE) means is that The Fed has been buying $120 billion/month in US Treasury bonds and mortgage-backed securities. And they’ve pledged to keep interest rates at near 0% for now.
We’ve gone up from The Fed’s balance sheet of these securities being at $3.75 trillion in 2019 to just about $8 trillion as of June 2021! This is an increase of $4.25T or 213% that the Fed has injected into the US economy to spur spending and get banks lending money to make the world go round again.
I briefly explain the difference between CPI and PCE, and why the stock market didn’t really react to CPI going to 5%. However, a Reuters article suggests we would need PCE inflation to hit 2.8% and stay there for at least 3 months before The Fed might do something. If the Fed did anything, it would likely reduce their bond purchases before they consider raising interest rates.
Markets might really react if The Fed were to raise interest rates, which as of June 16, 2021 might be anticipated to be in late 2023.
I note where we are now with how the Fed is tracking progress toward max employment and stable prices based on PCE inflation and the unemployment rate as part of its Dual Mandate. I show what The Fed’s ideal unemployment and PCE inflation rates are and where we are now as of Spring 2021.
I explain the various inflationary and deflationary forces that are affecting consumers and markets. Deflationary effects may include an aging population, a decline in birth rate, and increased technological innovation. Inflationary effects resulting from supply chain disruptions and monetary/fiscal policies may include increasing gas prices, tuition prices, BBQ brisket prices, and computer prices may be somewhere in between of better products at comparable prices to many years ago.
In the 8 months since October 2020, I’ve seen gas prices go up by 53% from $1.87/gallon to $2.87/gallon!
I use a Risky Business movie example of how inflation has affected someone getting a Harvard MBA from 1982 and the resulting salary expectations. What I found is that tuition cost has outpaced the starting salary adjusted for inflation!
I summarize current inflationary and deflationary forces trends and examples and how we are dealing with both forces. I encourage you to think about how these forces may be affecting your life and how you might want to prepare for the future.
If inflation is 3%, employees might get a 2% pay increase. Psychologically, people would rather see their money inflating than deflating, even if they can’t buy as much.
If deflation is 3%, employees might get a 2% pay cut. Psychologically, no one wants a pay cut, or to be paying negative interest rates to store one’s money in a bank.
There’s been so much money printing and it’s no wonder that the stock market has been hitting all time new highs. To me, it’s a big cause for concern because I think a lot of equities are overpriced. So I’m happy to stay in a lot of cash, waiting for the “Everything Bubble” to burst.
Right now, the best thing to do is to just get on with life as summer is rolling in and enjoy life as much as we can. But I think it would be good to keep an eye out for if the kind of inflation that The Fed cares about is hitting around 3-4%, that might be a warning signal. Maybe that’s when this movie will finally end.
I look forward to making more investor friends! Add me on Instagram: michellemarki! 🙂
If you’re interested in learning how to take control of your finances and start becoming an investor like Warren Buffett, check out my free PDF guide.