For the last couple of months, stories of inflation have dominated the mainstream media in America. Although these stories keep dominating the media landscape, no concrete data is available to support the claim that there is low inflation or the country is poised for it to rise. This article offers essential insights into the actual picture on the ground.
Background to Inflation Scare
In the last few months, prices of consumables, like grocery have been going up. A walk to any grocery scares consumers as they’ll pay 5% more than what they paid the last spring to buy pork. Pump prices have also been rising, and consumers feel the financial pinch whenever they fuel their vehicles. However, the biggest question in the minds of consumers and economists is whether these are signs of inflationary pressure. Are the price spikes signs of the start of hard economic times or an indication of Covid-19 recovery?
Although nobody can answer this question with certainty, the available evidence indicates that the country might not encounter any economic hardship. Furthermore, the mere rise of prices of consumer items isn’t enough indicator to measure inflation.
Before delving further into the nitty-gritty of this topic, it’s critical to understand what inflation is and how it affects the economy. Inflation is a spike in commodity prices. This means that spending more to buy goods and services.
While inflation is associated with every sort of negative thing, some level of inflation is healthy for the country. Economists agree that a 2% inflation level is a sign of a bubbling economy. Deflation would be a much worse sign.
Currently, in the US, the country’s low inflation is due to multiple factors arising out of the Covid-19 pandemic. These include low-interest rates by the Federal Reserve, numerous rounds of direct federal government stimulus, and repressed emotions being released as the US economy opens.
Want to trade in USD with other currencies in pairs? Definitely check out forex brokers with a chargeback facility or an association with the best chargeback firms.
Combining the above factors has led to a higher demand for goods and services, outpacing the supply. This has led to a spike in goods and services, even though unemployment has risen.
“It was just 12 short months ago that many were afraid to even emerge from their homes,” says Deron McCoy, chief investment officer at investment advisory firm SEIA.
The remarks by Deron McCoy mean that people have not been spending and plan to make up for the lost opportunities. And this means that the temporal inflation at the moment is nothing to worry about. In fact, it’s an indication that the economy is recovering.
To understand the current situation, it’s critical to shed some light on where the US economy has come from as regards inflation. In the past, inflation was associated with wars that led to a low supply of goods and services. The 60s and 70s were years of protracted inflation in the US. In the 1965, the US increased its expense on the Vietnam War. As a result, prices of industrial goods rose, and many consumers had money in their hands but chasing few goods. President Nixon’s fiscal policies and the huge amounts of war expenses led to high inflation, hitting 6% by the 70s.
In 1973, matters took a turn for the worse due to escalating tensions in the Middle East. An oil embargo in that year led to high oil prices that brought the economy almost to its knees. During that time, inflation rose to 7.1%.
Although Nixon articulated policies to control wage and price, the measures only led to pent-up demand, poor growth, and inflation. Here, a prominent contributor to inflation was the president’s policies. Nixon, for example, pressured Burns, who was the Fed Chair, to maintain a low-interest regime. Because of the fear that he would be blamed for the recession, Burns yielded to the president’s pressure.
The above historical situation paints a picture of high-level inflation brought about by the protracted Vietnam War and poor monetary policy. At that time, inflation had hit 7%. At the moment, people are jittery when the level of inflation is only at 2%. And according to economists, this level is healthy as it shows that the economy is recovering from a pandemic.
How Low Inflation Affects Housing and Stock Markets
Although global stock markets are experiencing low activities due to fears of inflation, the dollar is surging. Stats from the retail sales data indicate that the economy is in a robust recovery mode. Contrary to expected low activities in the stock markets, bond yields are going up. The 10-year US Treasury is trading at 1.2928%, meaning it’s 0.2 points higher.
Due to fears of inflation, equity markets are declining as investors become more risk-averse. The good news is that the prices of defensive stocks are rising.
The current low inflation happens because the country is in a boom. In other words, the economy is recovering, and people have started spending more on consumables. In terms of the stock market, people may be inclined to invest in bonds rather than equities as they watch inflation. Remember, bonds are long-term investments and may not be affected by the current situation.
Data for housing indicates that the price of shelter has gone up. A recent report by Case-Shiller Home Price Index for April 2021 suggests that shelter rates were up 14.6% nationally. This figure represents the highest increase for the last 30 years. However, housing is different from other goods that can offer a realistic inflation rate.
“The rate of house price appreciation is not akin to inflation,” said Mark Fleming, chief economist at title insurance company First American Financial Services.
The meaning of Fleming’s remarks is that we can’t attribute the rising cost of housing to the current low inflation. So, the country will not encounter a situation where people vacate their homes.
Recently, most Americans had rising inflation expectations. The truth of the issue is that there has been a low form of inflation that brought about the country’s gradual opening of the economy. After many months of staying at home, many people have not been spending on non-essential items. However, as the economy is opening, people have started spending, and the demand for goods has outpaced supply.