Updated: Jul 12
Transcript summarized below:
According to an article from Business Insider, the price of lumber has risen 250% in the past year. Homeowners are receiving cold calls from prospective buyers asking if they're interested in selling their house. With trillions of stimulus money sloshing around an economy that's marching full steam ahead as the world begins to reopen, the price of goods and services are spiking. But how much inflation can the country afford before we’re in serious trouble? Stick around, let's find out.
Hello and welcome to another video from One-Up Financial I am your host Eric Presogna here to help you increase income, reduce taxes and invest smarter in retirement.
Is inflation something you should be concerned about? Before I address this question, let's first get on the same page about some of the basics of economics.
If you’ve noticed the price of a thing increasing over time (say, your favorite candy bar or the cost of college tuition), that’s inflation in action.
Economists use the broad increase (or decrease) in prices of goods and services across the country as a measure of economic health. When inflation is stable and predictable, it’s a sign of a basically healthy, growing economy.
But, high inflation can quickly eat away at the purchasing power of your dollars, indicating that the economy might be overheating.
Conversely, deflation, or a decline in prices, can be a warning sign of a shrinking economy.
So that in a nutshell is quick and easy crash course on inflation which I think is going to be an important economic metric to follow this year as recent data highlighted a surprise spike in inflation, indicating that prices increased faster than economists expected in April.
Could this be a worrisome sign that the economy is overheating? Could $50 burgers be in our future?
When inflation risks are present, it is common practice for the Federal Government (the Fed) to step in and raise interest rates to help stabilize the economy and prevent it from overheating. The problem, however is the Fed has said on multiple occasions it believes the inflation we're seeing now is "transitory," or temporary and resulting from of our emergence from the global pandemic. Accordingly, the Fed doesn't plan to raise interest rates until sometime in 2022/2023.
Could this be a temporary blip caused by the economy surging from the pandemic-driven slowdown, complicated by pent up demand and supply chain issues?
Let’s look at the data.
The Consumer Price Index (CPI), one of the major indexes economists use to track inflation, showed a surprising spike in April, igniting fears of runaway inflation.
Core CPI (which excludes the highly volatile categories of energy and food) showed a 0.9% increase in April month-over-month and 3.0% year-over-year. That’s much higher than the expected 0.3% and 2.3%, respectively.
However, digging a bit deeper, we see that just two categories of goods (used cars and transportation services) accounted for the vast majority of the surge.
That suggests things like flights and train travel suddenly became more expensive after a year of rock-bottom prices. And the jump in used car prices? Well, many folks are turning to the second-hand market right now, in part because new cars are caught up in global supply chain bottlenecks for things like semiconductors and raw materials.
Is that runaway inflation or the normalization of prices as the world reopens?
It's hard tell from a single data point, but it's not unusual to see prices increase in sectors that experienced a severe slowdown last year.
So is inflation something you should be concerned about? I think a single monthly spike in CPI following a very weird period for the economy is not cause for alarm yet; we should prepare ourselves for more odd numbers coming out of different parts of the economy in the weeks and months to come.
Inflation is definitely something to keep an eye on, especially in a year when trillions of dollars of stimulus money is still floating around, not to mention the upcoming monthly cash advances of the child credit.
Shortages of everything from ketchup to gasoline could lead to price increases and fluctuations as supply chains attempt to disentangle from pandemic disruptions. And though these increases may indeed be transitory, I suspect we're going to see higher grocery bills, flight costs, and 3-hour waits for dinner at Olive Garden that last well into 2021.
How will the markets to react to inflation (and other) headlines?
A negative market reaction is not surprising after weeks of strong performance. We should expect volatility ahead as we (and the economy) adjust to a post-pandemic world.
Bottom line: Expect the unexpected in 2021 and be sure you're keeping your retirement and financial plan updated to account for this unusual spike in prices.
Thanks as always for tuning in to watch our videos. If you're interested in staying up to date with our market and financial commentary please subscribe to our blog at oneupfinancial.com/blog or follow us on LinkedIn and Facebook. Thanks again and we'll see ya in the next one.