Inflation: The Consumer Price Index is up at a 10% annual rate. Should we be worried?

There are several reasons behind these higher-than-usual numbers:

• The rate is overstated due to comparisons with last year’s unusually low, pandemic-driven inflation.
• Government subsidies have added to demand.
• Consumers have resumed spending after months of pandemic-related restraint.
• Pandemic-related supply chain issues are distorting prices. For example, leasing companies didn’t buy new cars last year, so there are fewer used vehicles on the market — driving up used car prices, a significant component of the CPI.
• Consumer price data collection has been disrupted. In-person interviews were suspended in March 2020, possibly leading to data inconsistencies.
• Wages have risen as employers compete for workers.
• Stockpiling (let’s call it “strategic buying”) has pushed prices up in some sectors.
• Massive government spending proposals may be funded through printed money rather than taxes or borrowing. Historically, this has contributed to inflation.

But relief is on the way:

• The supply of goods and services is increasing, while “catch-up” demand is expected to taper.
• Year-over-year comparisons will begin to normalize as we move past the distorted data from 2020.
• Government subsidies are winding down.
• Stockpiling will decline as production ramps up and makes hoarding less advantageous. Just-in-time supply chains will re-emerge. Notably, lumber prices have already dropped 70% from their recent peak.
• Tax increases are being proposed to help pay for new government programs, potentially reducing inflationary pressure.

Overall, we believe the long-term battle between inflation (which raises prices) and innovation (which drives them down) will continue. As investors, we remain confident that owning innovative, profitable companies at reasonable valuations will reward us — regardless of how the inflation story unfolds.

Katz Family Financial