I would be remiss if I didn’t start this year’s blog, which centers on inflation, without acknowledging the questions we were considering at the beginning of 2023.
Referring to the January 2023 post titled ‘2023: In like a lion, out like a lamb?’:
“Questions to determine this year’s fate are: Is the engineered slowdown successful? Is the Fed able to ease their restrictive policy to a more neutral one, as inflation abates? Is the elusive ‘soft landing’ that nearly nobody believes is possible, possible?”
The U.S. Federal Reserve (Fed) meeting in December 2023, followed by the news conference with Jerome Powell, was largely a victory lap, celebrating the successful reduction of inflation throughout the year. Starting in 2023 at 6.4% and ending at 3.35% (after reaching a peak of 9.1% in June 2022), with the trend firmly pointing down, leading investors to anticipate a successfully engineered slowdown. The question now is not “if” but “when” the soft landing will occur, with expectations of Fed policy easing throughout 2024. Investors cheered declining inflation reports throughout 2023 with double-digit gains across all major U.S. averages, the majority of which occurred in Q4.
Source: YCharts US Inflation Rate
Looking ahead, what can be anticipated of inflation in the U.S., and what type of Fed policy positioning can be expected? This year, I’ll focus on how inflation might unfold over shorter and longer time periods. Additionally, I will explore the connections between various forces at play in the post-COVID inflationary era we just experienced and how we can expect them to shape the future. Some factors result from cyclicality, while others are more enduring and worth a deeper focus.
Short – Medium Term factors:
Factors influencing inflation in the short to medium term are mostly cyclical. They will ebb and flow regularly as the economy finds equilibrium in each factor:
- Supply chain: Issues like transportation bottlenecks and raw material availability, or lack thereof, causing downstream effects on the delivery of finished goods to the consumer.
- Consumer behavior: Sudden changes in spending patterns or demand for a particular type of good causing excess demand on a constant supply.
- Labor market: A robust labor market with rising wages empowers consumers to spend on more of their “wants” in life, in excess of their “needs.” Conversely, a weak labor market forces the consumer to decrease this spending, focusing on ‘staples’ or daily needs.
- Global economic factors: Trade dynamics, geopolitical events, and commodity prices can impact the supply/demand for various types of goods.
- Government factors: Most commonly, fiscal policies and government spending can cause short-term imbalances to occur.
We can quickly see how many of these factors aligned in the post-COVID environment, causing the ‘perfect storm’ for inflation. Immense demand from individuals coming out of lockdown, “revenge spending” funds from their jobs and/or government stimulus, coupled with restricted supply due to international lockdown and distorted supply chains.
In response, global central banks employed monetary policy measures to address inflation concerns. Adjustments to benchmark interest rates, bond portfolios, and other monetary tools were (and are still being) used to influence inflationary forces.
Medium – Long Term factors:
Long-term inflation trends are often associated with structural changes in the economy. Technological advancements, demographic shifts, and changes in productivity levels can have lasting effects on inflation.
A growing economy is [obviously] necessary for economic progress. To measure this, economists use a “Growth accounting” formula, calculated as:
GDP Growth =
+ Capital Growth: Increase in capital, or investment to the economy to increase productivity
+ Labor Growth: Increase in the number of workers in an economy to increase output
+ Technological progress: Better technology facilitates greater output with the same amount of the above two factors
In my opinion, technological progress is the most interesting factor for investors to consider over the longer term. Electricity, the assembly line, the industrial revolution, and the technological revolution are examples of how human inventions and creativity enabled an exponential rise in productivity, far exceeding what could have been achieved with increased capital or labor. Increasing innovation in automation, robotics, cloud computing, and artificial intelligence foreshadow significant productivity gains due to technological innovation in the future.
Where investment in capital must maintain some level pace over time, or risk becoming inflationary (if too much new capital is demanded at the same time). And labor growth only able to go so far before reaching maximum employment (as we are already in the mid 3% unemployment rate), then causing wage inflation. Technological progress can open doors to meaningful GDP growth.
As you likely read every day, innovation in the U.S. is primarily in the technology sector, where there appears to be a long runway for a variety of tools to drive productivity gains. Technological advancement has the potential to significantly boost the U.S. economy in the long term by increasing productivity, fostering innovation, and improving the quality of life. Cloud computing, robotic process automation, machine learning, artificial intelligence are currently daily buzzwords, but those companies and individuals that can harness the power of these technologies will drive global development for years to come.
Going forward, there is bound to be a push and pull on inflation. Certain deflationary forces facilitated by innovation can be counteracted by other trends such as deglobalization, nationalism, and new alliances reversing many deflationary trends experienced over the last 30 years.
In conclusion, understanding inflation requires a nuanced perspective that considers short-term disruptions, medium-term policy responses, and long-term structural factors. While short-term spikes may occur due to various factors, policymakers and individuals alike should focus on fostering stability over the medium and long terms. Keeping an eye on global economic dynamics and embracing adaptive strategies will be essential as we navigate a complex, dynamic landscape. My view is that companies providing real value and cost savings are investments that are not just worth making but are critical to survival.
—
For reference, visit:
YCharts US Inflation Rate
—
The opinions expressed in this blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice. Please review full disclosure at link, below.
Inflation perspectives: Factors to consider and how society ‘invents’ out of it
I would be remiss if I didn’t start this year’s blog, which centers on inflation, without acknowledging the questions we were considering at the beginning of 2023.
Referring to the January 2023 post titled ‘2023: In like a lion, out like a lamb?’:
“Questions to determine this year’s fate are: Is the engineered slowdown successful? Is the Fed able to ease their restrictive policy to a more neutral one, as inflation abates? Is the elusive ‘soft landing’ that nearly nobody believes is possible, possible?”
The U.S. Federal Reserve (Fed) meeting in December 2023, followed by the news conference with Jerome Powell, was largely a victory lap, celebrating the successful reduction of inflation throughout the year. Starting in 2023 at 6.4% and ending at 3.35% (after reaching a peak of 9.1% in June 2022), with the trend firmly pointing down, leading investors to anticipate a successfully engineered slowdown. The question now is not “if” but “when” the soft landing will occur, with expectations of Fed policy easing throughout 2024. Investors cheered declining inflation reports throughout 2023 with double-digit gains across all major U.S. averages, the majority of which occurred in Q4.
Source: YCharts US Inflation Rate
Looking ahead, what can be anticipated of inflation in the U.S., and what type of Fed policy positioning can be expected? This year, I’ll focus on how inflation might unfold over shorter and longer time periods. Additionally, I will explore the connections between various forces at play in the post-COVID inflationary era we just experienced and how we can expect them to shape the future. Some factors result from cyclicality, while others are more enduring and worth a deeper focus.
Short – Medium Term factors:
Factors influencing inflation in the short to medium term are mostly cyclical. They will ebb and flow regularly as the economy finds equilibrium in each factor:
We can quickly see how many of these factors aligned in the post-COVID environment, causing the ‘perfect storm’ for inflation. Immense demand from individuals coming out of lockdown, “revenge spending” funds from their jobs and/or government stimulus, coupled with restricted supply due to international lockdown and distorted supply chains.
In response, global central banks employed monetary policy measures to address inflation concerns. Adjustments to benchmark interest rates, bond portfolios, and other monetary tools were (and are still being) used to influence inflationary forces.
Medium – Long Term factors:
Long-term inflation trends are often associated with structural changes in the economy. Technological advancements, demographic shifts, and changes in productivity levels can have lasting effects on inflation.
A growing economy is [obviously] necessary for economic progress. To measure this, economists use a “Growth accounting” formula, calculated as:
GDP Growth =
+ Capital Growth: Increase in capital, or investment to the economy to increase productivity
+ Labor Growth: Increase in the number of workers in an economy to increase output
+ Technological progress: Better technology facilitates greater output with the same amount of the above two factors
In my opinion, technological progress is the most interesting factor for investors to consider over the longer term. Electricity, the assembly line, the industrial revolution, and the technological revolution are examples of how human inventions and creativity enabled an exponential rise in productivity, far exceeding what could have been achieved with increased capital or labor. Increasing innovation in automation, robotics, cloud computing, and artificial intelligence foreshadow significant productivity gains due to technological innovation in the future.
Where investment in capital must maintain some level pace over time, or risk becoming inflationary (if too much new capital is demanded at the same time). And labor growth only able to go so far before reaching maximum employment (as we are already in the mid 3% unemployment rate), then causing wage inflation. Technological progress can open doors to meaningful GDP growth.
As you likely read every day, innovation in the U.S. is primarily in the technology sector, where there appears to be a long runway for a variety of tools to drive productivity gains. Technological advancement has the potential to significantly boost the U.S. economy in the long term by increasing productivity, fostering innovation, and improving the quality of life. Cloud computing, robotic process automation, machine learning, artificial intelligence are currently daily buzzwords, but those companies and individuals that can harness the power of these technologies will drive global development for years to come.
Going forward, there is bound to be a push and pull on inflation. Certain deflationary forces facilitated by innovation can be counteracted by other trends such as deglobalization, nationalism, and new alliances reversing many deflationary trends experienced over the last 30 years.
In conclusion, understanding inflation requires a nuanced perspective that considers short-term disruptions, medium-term policy responses, and long-term structural factors. While short-term spikes may occur due to various factors, policymakers and individuals alike should focus on fostering stability over the medium and long terms. Keeping an eye on global economic dynamics and embracing adaptive strategies will be essential as we navigate a complex, dynamic landscape. My view is that companies providing real value and cost savings are investments that are not just worth making but are critical to survival.
—
For reference, visit:
YCharts US Inflation Rate
—
The opinions expressed in this blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice. Please review full disclosure at link, below.