With Washington printing money like there's no tomorrow, inflation is on the mind of most people working for a living. Many are already talking with their 401k managers and financial advisors - wondering how to position their portfolio. Years have passed since prices skyrocketed and focused our attention on the economy. There are many factors at play, both short and long term. Investors should be on high-alert and prepare to move assets to protect their nest-egg.
I spoke with three residents in Johnson City and Bristol, who believe the time is getting close. They see hyperinflation coming and have warned their families to prepare. They have moved their investment accounts into more conservative portfolios and are no longer "playing" the stock market. One family suggested the steps they plan to take are to simply raise a bigger garden, can more food, and buy items they use often when they are on sale, and stockpile staple-goods.
A fourth family interviewed leaves their financial planning to a professional, and already raises a garden and cans their own food. You have to love the people of the area. They are down to earth.
Policy and progressives
Policymakers continue to downplay inflation concerns. Jerome Powell, Chairman of the Federal Reserve testified before congress, saying "prices remain particularly soft" even for those hardest hit by the pandemic.
Using the government's gauge of choice, the Consumer Price Index (CPI), proces only rose 1.4% in January. The Federal Reserve (Fed) sets a target of 2%. In fact, the montly CPI has averaged only 1.7% over the past decade. This would support Powell's assertians, but it is accurate?
The expected win by Joe Biden and the Georgia seats for U.S. Senate by the Democrats are on reason prices are expected to rise. The Democrtic control of the U.S. executive and legislative branches have already seen an increase in federal spending. With "stimulus" payments and other programs, inflation is already expected to climb well over 2% since 2018.
Government bonds used to finance the spending have flooded the market, pushing up yields. The 10-year Treasury note yield rose over 1% for the first time since the COVID-19 pandemic began. Economic growth is sure to grow as the pandemic recedes, yet the Fed has stated it will keep short-term interest rates low. This could also influence inflation.
The Fed’s new monetary policy is designed for inflation above targeted levels, at least for short periods. This attitude influences expectations from investors and the central bank. It could even cause hyperinflation of prices.
The root of inflation is based on supply and demand. When there is too much money in the market and limited assets, prices go up. The global financial crisis (2008) did not see significant inflation. Banks were not readily lending money, thus there was not a surplus of funds for the goods normally bought.
On the flip-side, funds have sharply increased during the pandemic with the increased printing and distribution of money. This is another concern and why prices are expected to increase. Bottlenecked supply chains due to COVID-19 have decreased available assets while the money supply has actually increased.
(Photo by John Dabbs)
Food trucks in Johnson City and around the Tri-Cities were seriously impacted. A few were forced to close their doors and sell of the assets. Shane Lewin, of Shane's Place in Gray, Tennessee ran into serious issues when their freezer died and they were unable to replace or repair it due to supply chain issues. Sam's Club, Best Buy and other outlets were unable to find a replacement unit due to the bottleneck on the docks and in China.
Food costs increased, while locations allowing food-truck events shrank dramatically in the region. Sam's Club offered a short reprieve when they closed their in-store deli and allowed local food-trucks to set up in their parking lot for patrons on a temporary basis.
Costs have increased on most goods and commodities, such as cotton, lumber, metals, and food. Inflationary pressure creates a rise on all goods and services. As inflation grows, the value of the dollar shrinks.
While it is easy to predict inflation, predicting the impact and rate are more difficult. Recent history does not help. From 2009 to the beginning of the pandemic-recession (March 2020), the monthly inflation rate using the key-price index avearage 1.6%. Since 2008, inflation has only risen to the Fed's 2% target for 13 months.
Will prices go higher? 4% maybe? Economist and policymakers may worry prices are getting out of hand if it occurs. Inflation spikes occur rapidly. Once they take hold, it is difficult to reign in inflation and get prices under control.
Is the CPI accurate
Economist have begun questioning the new CPI formula and its accuracy. Most Americans can list a number of real examples where prices are climbing above 2% since last year. Food, gas, and electric bills come to mind. These have all gone up significantly.
The retail and service industry in Johnson City have seen an increase in the CPI. the other mitigating factors such as shutdowns related to the pandemic have taken a heavy toll on many restaurants and other business owners. Fuddrucker's and Steinmart closed their doors in Johnson City for good, among others. We were lucky that at least I-HOP was able to reopen after shuttering its doors and declaring itself no longer in operation within the city.
Food and shipping
(Ajohns90, CC BY 3.0 via Wikimedia Commons)
The UN's Food-Price-Index measures food commodities. As of January 2021, the FPI has risen for eight months straight. It is the highest now since July of 2014. Vegetable oils in paticular have risen to a multi-year high, due to excessive rains in Indonesia and Malaysia.
Progressive fiscal policies
Unlike food and shipping prices, which can come under control without interference, government policies require intervention. Unfortunately, not all governing bodies act like a fiduciary with tax dollars. Tennessee and the Tri-Cities are generally governed by fiscally responsible people.
PIMCO economists Libby Cantrill and Tiffany Wilding predict the including $1,400 "stimulus" checks could push economic growth to 7-7.5%. Such grown has not occured since thearly 1980s. Unfortunately, we could also experience inflation not seen since the 1970s. While Cantrill and Wilding do not believe inflation will return to those levels, it "inflation could exceed central bank targets eventually."
Should a federal minimum wage hike to $15 an hour by 2025, it will contribute to an increase in the CPI. A study by the Federal Reserve Bank of Boston's economists in 2017 listed the increased CPI projection as a significant finding. The team found a 10% minimum wage increase in an area would be associated with an overall inflation rate of 8 points higher, compared to areas that didn't institute the wage increase. An increase to $15 an hour is a 107% increase. Using the 2017 study's calculations, it would add a full point to annual inflation.
Should investors rotate their portfolios into hard assets such as metals and other commodities? That is a question for your bring to your financial advisor. The decision must be based on your individual circumstances and risk tolerance.
We've seen price increases already. Commidity prices have benefitted from near-zero interest rtaes. The economic recovery from stimulus funds and other rescue packages have come bear. The Bloomberg Commodity Index (an index of 23 raw materials), has risen higher than any level since March 2013. Institutional investors and hedge fund managers are betting on continued fiscal stimulus funds.
The 49 year old policymaker for the Bank of England, Gertjan Vliegheas, was quoted in an online conference - saying he did not believe "normal" rates (before the financial crisis) would return within his lifetime.
With many commodities at 52-week highs. Oil is above $60. Predictions of $75/barrell by summer have been made by analysts from Goldman Sachs. If you'll recall - refineries in Texas were impacted by severe cold weather this winter and many were without power.
As the governments push for an increase in renewable energy, precious metals used in technology has increased. Copper, is over $9 thousand/ton for the first time in nine years. Silver hit $30/ounce.
Inflation is coming to the U.S. this year. The question remains...how much, and will Johnson City, Kingsport and Bristol suffer inflationary rates as high as other metro-areas in the U.S.?
While price increases faster than the Fed’s magic 2% could be welcome - too much is a problem. It could put the Federal Reserve in a real bind... not to mention us pawns where the work gets done.