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I'm a worrier by nature, constantly looking under rocks for things that can go wrong. However, if I take a step back, I see a lot to be positive about, consumers are spending, household wealth is strong, corporate earnings are booming and stock markets are at new highs. Nevertheless, here I go. Everyone is talking about inflation. Whether it's personal, like the cost of tonight’s dinner; or macro-economic such that it affects government and central bank policies it's hard to have a conversation these days without the topic of increasing prices being raised. Despite the recent stunning escalation in certain products such as lumber, gasoline and even steak, it is important to remember that inflation has become a government sanctioned policy. Probably prodded by the fear of deflation and led by the Federal Reserve, it has become gospel for central banks to maintain 2% as an appropriate target for inflation. Recently, they have also acknowledged that CPI will exceed 2% occasionally in order to average 2% over time. While that number sounds relatively benign, over the course of every ten years that rate will cause prices to rise 22%. So, if you had paid $30,000 for a car in 2001 and you are looking for a similar model today and it lists at $45,000, don't be dismayed, that’s what it’s supposed to cost according to the Fed. At any rate no longer do the powers that be see inflation as an evil monster to be fought at all costs, although it is not so long ago that was the case. While the Consumer Price Index can be questioned as an accurate measurement of the cost of living, the recent report for September showed overall prices up 5.4% over the past year in the US. That is certainly not a pleasant number, but it was led higher by a significant rise in energy prices (gasoline 42%, fuel oil 42% and natural gas for utility companies 20%). Those type of increases are unlikely to continue longer term so we should see some amelioration as we move forward. That won't necessarily make our day-to-day budgeting any easier, but the math will cause the CPI to look more palatable when we read future reports. This in no way suggests there is no cause for concern, but rather that headline numbers can be misleading, both on the upside and downside.
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By The Way - October 2021
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