Beginning in the summer of 2020, the word inflation reappeared after years of being dormant. Some investors feared the aggressive actions by the Federal Reserve and initial U.S. stimulus payments following the economic and financial market declines of early 2020 were too bold and inflation would rise as a result. Now into 2021, inflation is still a commonly heard concern, especially after additional stimulus payments, talk of a major infrastructure spending bill, and an economy roaring back to life.
The commonly reported inflation measure (Consumer Price Index) increased in March at the highest rate in two and a half years (+2.6%), but this measure is heavily influenced by energy prices. Removing energy (and food prices) and inflation grew only 1.6% in the past year. High unemployment levels remain a drag on economic activity and lessens the ability for corporations to push through price increases. Furthermore, any tax increases would be a deflationary force. Equity markets have historically preferred stable and low inflation and equity investors remain unconcerned with today’s inflation levels. Bonds have struggled recently, but it is unclear whether this is due to a fear of inflation, concerns over rising U.S. debt levels, or simply an investor preference for riskier assets.
Alan Bergin is the Senior Vice President of Fund Evaluation Group in Dallas, TX, the Foundation’s consulting firm.