Fall 2021 Newsletter

Take Inflation Seriously
By John Park
From investments to complicated retirement strategies, John works to educate and advice his
clients on making smart financial decisions.
T.
he past 18 months have
given us a mixed bag of
economic data and indications.
We have been experiencing a
unique situation in our
economy. We have faced
shutdowns, capacity
limitations, social distancing,
supply chain shortages,
certain price increases, and
certain price decreases. How
can we analyze the economy
in such an abnormal
environment that has few or
no comparisons? Well, we can
go back to basics and analyze
fundamental indicators.
For the sake of time and your
sanity, I am not going to
cover a ton of different
in-depth economic figures.
We are primarily concerned
with evaluating inflation and
its implications.
It is easy to look around and
declare that inflation is a
problem because of the
increased cost of vehicles and
other durable goods
(appliances, furniture,
computers, etc). It is equally
easy to say inflation will be
short-lived because it is a
direct result of a temporary
shutdown and a restricted
economy that has since
re-opened.
What are the numbers telling
us? How bad is inflation? Is it
here to stay?
Many have claimed success
over August’s inflation
measurement of .3% when
.4% was expected. They also
ignore the fact that the
Consumer Price Index, a
primary inflation indicator, is
up 5.4% over the preceding
12 months. I do not need to
spend much time convincing
you that inflation is an issue
right now. You can see it at
the gas pump, grocery store,
car lot, and more. Will it be
short-lived? I do not think so.
I am going to put myself out
there a little and say I expect
inflation to be a major
concern through 2022.
There are a couple of factors
contributing to inflation.
First, we have a supply chain
shortage due to resources
and labor limitations. For
example, you have probably
heard about the chip shortage
in the automotive industry.
Cars are back in demand
post-shutdown, manufacturers
cannot make enough to satiate
demand, so up goes the prices.
We also have a problem with
our labor supply. Despite many
businesses trying to hire staff,
jobs are not getting filled. The
unemployment rate at the end
of 2019 was 3.5%. It currently
sits at 5.2%. That is a 48.57%
increase. Yikes!
Higher unemployment will
slow down our Gross Domestic
Product (GDP). If demand for
goods and services remains
high and the supply cannot be
delivered , inflation could
remain a problem for quite a
while.
What are the numbers
telling us? How bad is
inflation? Is it here to
stay?
Another inflation factor is at
play. The M2, or money supply
measurement, is very high
compared to pre-COVID 19
levels. This is a measurement
of the money available to the
economy across financial
assets like cash, bank
deposits, investments, and
other assets that can be
quickly converted and
liquidated. The M2
measurement is 32% higher
than it was pre-COVID 19.
This means there is a lot of
cash on the sidelines which
can be spent on goods and
services. Also, if interest
rates are low, it is easier for
people to borrow so they can
spend, which also increases
the money supply and drives
up prices.
STRATEGIC PLANNING GROUP 5