Has Rising Inflation Returned?

If you have had your eye or ear on any of the national or business media over the last several weeks, I can guarantee there is a word that you have heard them use almost to the point of overuse: inflation. If you listened closely, you probably also heard the overuse of the word ‘transitory’.
With the onset of the Pandemic in 2020, prices on goods and services declined rapidly and spent much of 2020 at significantly lower levels than was seen in the previous years. This set the stage for some level of transitory inflation as we move through 2021, meaning we will see prices increase on a year-over-year basis, but that the rate of increase is not concerning because the level that it was coming from was artificially low, creating an artificially high rate of increase. Many in government and at the Federal Reserve believe that while we will see a spike higher this late-spring and summer, by the end of the summer the rate of inflation will stabilize and be at a number near their new average inflation target of 2%. But, what if it doesn’t?
 
For the last 4 decades, we have been in a steadily deflationary environment. And for the last decade, the Fed has been doing what it can to try and get inflation to rise – even to the point of recently changing their inflation target. They had been working on a 2% inflation goal and have now moved to a 2% inflation average. While that wording may seem slight and not meaningful, it does allow for higher inflation to persist due to the amount of time that has been spent below that 2%. The Fed has not indicated through what time period they will be viewing or measuring their average.
 
The problem to rising inflation is in the response. For those that remember Paul Volker and the 1970s, the Fed’s response when inflation rises too high or too fast was to raise interest rates, to tighten the money supply and reduce inflation.
This can have a recessionary impact on the economy if not properly applied. Much like slowing your car, hit the brakes too fast and you end up against windshield.
 
So, while this buzz word and the impending doom that the media is trying to get you to believe is coming is a real issue, there is not enough data yet to understand the trajectory of inflation and the response needed to work through it. It is very likely that those that believe inflation is going to run to the high side have underestimated the impacts of continued technological deflation. Those that are dismissing this move-up entirely are missing the fact that real wage inflation and the impacts of the freshly-minted trillions of dollars of government stimulus are going to have a lasting impact. Only time will tell us which way to lean, but the answer is most likely to be found somewhere in the middle, as it often is.
 
The strength in our planning is our ability to remain flexible to the world around us and to the changing and evolving needs in your life.
 
Remain focused on enjoying the sunshine this summer and taking part in the family and social events that we all missed over the last year, and know that your team here at Midwest Financial Group is diligently working to help keep your financial plan on track.
 
Stay in touch, and we will continue to provide additional information as it is relevant.
 
Brandon Masbruch

Chief Investment Officer