Inflation in the US hit a 31-year high in October, with the data showing prices increased 6.2% over the prior year. The market reacted quickly, snapping the 8-day winning streak with a drop on Wednesday. And then reality set in, and the market began to rebound on Thursday. Fundamentals, meaning the financial picture for companies, remain strong, and corporate earnings are higher than expected.
Inflation happens when there are too many dollars chasing too few goods. The Federal Reserve Bank, or the Fed, and many economists, believe the current inflation is transitory. We have pent-up demand from the pandemic shut-down. We’ve talked before about the K-shaped recovery, meaning that financially, 2020 was mostly either really good or really bad. Many people paid down debt and increased savings last year, and are ready to spend this year. That’s the too many dollars.
Add to that the bottlenecks at various places along the supply chain. Ports can’t offload ships fast enough. And it’s estimated we need an additional 80,000 long-haul truck drivers to meet current demand. That’s the too few goods.
The Fed is balancing their dual mandate of price stability and full employment. Unemployment continues to tick down, but the labor market has not fully recovered. The long-term goal for inflation, the price stability part of the mandate, is 2%. We’re clearly well over that. The question is if it will stabilize as the supply chain issues are resolved.
The Fed has already begun tapering, or reducing, their bond purchases. This tightens the monetary supply – helping to reduce the too many dollars side of inflation. If inflation continues, the Fed will begin increasing interest rates sooner. Rising interest rates can be good for savers. It would be nice to earn a little more than point zero zero zero two in our savings accounts. But the flip side is that the cost to borrow also increases. If you’re in a position to refinance debt, or pay down debt, now’s a good time to work on that.
Your action to take this week is for anyone with young adults coming home for the holidays. If they are Maryland residents and don’t already have them, use the time at home to complete the Maryland statutory Power of Attorney and Medical Directive forms. You can find them online, or give us a call and we can help. We’re also happy to notarize them in our office. Be sure to check out all our tools on our website at covingtonalsina.com, as well as our Facebook page for more information.
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