We hear a lot of talk about inflation in the USA. But it is not just an American problem. Look at the following chart:
On the One Hand, Inflation Looks High
So here is what is making the news. Inflation measures are up. Prices are rising at a faster rate than they have risen in many years. Retail sales jumped huge. The CPI rose at a rate of 6%, annualized, for June 2021. A lot of the inflation is due to supply chain problems. Many workers around the world are getting sick with Covid. Parts and other supplies are on backlog. Ships are stuck at sea and unable to come into port. Another key driver of the inflation is due to the price of commodities. Used car prices are up something like 10% year over year. Hotels and motels and rental cars are all more expensive. Whew! That sounds horrible, right?
On the Other Hand, Inflation is Not that High
Only 34% of goods and services have risen in price by more than 2% over the past year, and that percentage is falling rather than rising.
Compared to commodities, services are a much larger part of the economy. And prices on services are not up that much.
The point of all this is that the economy is reopening. This “reopening factor” is driving a lot of the inflation. The prices are likely to level off, and that does not mean they will be less expensive. However, inflation may be temporary. In fact, that is what the Federal Reserve predicts.
Inflation May Be Temporary
The Federal Reserve has declared that inflation is temporary. If you think about it, that makes sense. After all, inflation is measured on a year over year basis. A year ago, the economy was in a pandemic recession. Now that we are coming out of the malaise, people are spending money. And, as discussed above, they are spending money on certain things that are increasing in price.
What Inflation Means for Our Investments
As we discussed in a recent Periscope, we have a nuanced approach to inflation. For details on how our investment portfolios are positioned, please read the brief Periscope or download the entire investment commentary.
Click here to download the full investment commentary.
Click here for a letter from Linda Martinson, President and COO of Baron Funds on Inflation.