The financial news seems to be filled with talk of price inflation lately. The debate as to whether this recent spike in price inflation will turn out to be transitory in nature (as argued by the Fed) or more permanent is very undecided. Some even see a phase of deflation on the horizon as supply chain issues get resolved and we see a rebalancing of the supply/demand equation for some consumer goods.
The Consumer Price Index registered 4.48% in October, up modestly from 4.35% in September. For context, this is within the Fed’s own target range of 4.0%, plus or minus 2.0%. While the Fed may seem sanguine about inflation, many others are not.
Clearly, with oil prices in the $80 per barrel range and transportation costs that have skyrocketed, the potential for higher prices in the intermediate future remains high. We could discuss the pros and cons of U.S. energy policy but the fact is that we’re now more dependent (again) on foreign oil and the days of $25 per barrel oil that we enjoyed about 18 months ago are gone. As we enter the winter, the cost of home heating will certainly become more burdensome for most of us. In addition, food prices, which are heavily impacted by transportation costs, have moved and continue to move higher. While this isn’t news to anyone, these are things that we cannot make a decision to cut out of our budgets. So, the “basket of goods” that the economists refer to as a meter for measuring inflation is becoming a concern.
Elsewhere, price inflation has increased as well. Anyone out there that has been looking to do any level of home renovation or building can attest to that. In our area of the Northeast, prices for building have nearly doubled in the past two years. While some materials prices have moderated recently, the cost of building seems to have moved down very little.
According to the Department of Labor, here is sampling of some of the areas where prices have increased the most on a year-over-year basis as of October 2021 in major key categories:
- Fuel Oil 59.1%
- Gasoline: 49.6%
- Utility (piped) gas service 28.1%
- Hotels: 25.5%
- Used cars: 26.4%
- Furniture: 12.0%
- Meats, poultry, fish and eggs: 11.9%
- New vehicles: 9.8%
- Appliances: 6.6%
- Electricity: 6.5%
- Motor vehicle insurance 6.3%
So, while the overall rate of inflation may be within the Fed’s target range, depending on a person’s needs and lifestyle, they may be getting hit somewhat harder.
So, where do we go from here? We, at Atlas, are of the belief that price inflation will moderate sometime next year but that it may take many months for the economy to adjust to the imbalances that will be a result of this spike. As we enter 2022, we think that supply chain issues (which are one of the primary causes of the spike in prices we’ve seen) will ease. In addition, as the service side of our economy returns to a more normal state, we could expect to see capacity return to normal and prices ease. That said, we would not expect prices to immediately return to past levels for many necessary items as prices decrease more slowly than they tend to increase.
The question we, as investors, are focused on deals more with the impact on the growth rate of the economy, corporate earnings, and the prices investors are comfortable with in the capital markets.
We think that in the near term, and as witnessed by the recent release of quarterly earnings for publically traded companies, earnings will remain strong. Profit margins remain healthy at the current time while demand for goods and services seems strong. So, for the foreseeable future we are encouraged. Part of the investor conundrum though is how comfortable investors will remain with the current price to earnings ratio of the S&P 500 at a relatively high level.
We think that with interest rates continuing to remain depressed (despite current inflation) and given the amounts of investor cash sitting on the sidelines, the equity markets will remain supported. This is not to say that markets will head significantly higher or that we will escape interim negative volatility. However, we do believe that those investors that remain tolerant to any volatility we may see will continue to be rewarded for that patience over the long term even with a period of inflation and economic uncertainty.
As always, we at Atlas remain focused on these issues and are watchful for any opportunities that may result. If you have any questions about this or any other financial matter, please contact your Atlas Wealth Management Advisor. We are readily available to serve you.