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Anxious About Rising Prices?  Here's What You Need to Know About Inflation. [Video] Thumbnail

Anxious About Rising Prices? Here's What You Need to Know About Inflation. [Video]

Inflation Resurgence

In June, consumer prices surged 5.4%, the sharpest increase since July 2008.  July's inflation reading was just as high. As the economy has accelerated from the depths of the pandemic-induced recession, renewed spending has collided with supply shortages to drive up the costs of goods and services.  From industrial metals, oil and lumber to airline fares, hotel rooms and rental cars, the price of just about everything has jumped.  Disrupted global supply chains, labor shortages and pent-up demand have all contributed to higher prices:

Chart: US Inflation Rate over the short-term

Of course, the headline numbers don’t tell the whole story.  First, the Consumer Price Index (CPI) compares prices to those from a year earlier.  Last year’s base prices were abnormally depressed due to the pandemic, and thus created a significant upward distortion in June and July's CPI data.  Fed Chairman Jerome Powell expects current inflationary pressures to prove “transitory” as supply chains mend and labor shortages resolve as America returns to work. CPI data will likely confirm this as price distortions fade and comparisons with 2020 become less pronounced.  Second, while the CPI is a reasonable barometer for inflation, it is far from perfect.  Case in point, the price increase of used cars was responsible for about a third of the CPI’s 5.4% increase in June.  With about 40% of American households buying used cars annually, the semi-conductor and vehicle inventory shortages contributed to this interesting anomaly.  

Historical Perspective

To put recent inflation numbers in perspective, it is useful to examine historical inflation per the chart below:

Chart: Long Term US Inflation Perspective

Suddenly, today’s inflation readings don’t look so pronounced.  The United States has experienced four major bouts of inflation; (1) WWI; (2) the Great Depression; (3) WWII and the post war years;  and (4) The Great Inflation of the 1970’s and 1980’s.  Here are a few interesting data points from these time periods:

Chart: Interesting inflation data points in US history

On average, prices nearly doubled between the dates in the table above.1 Each of the bouts referenced herein was defined by a specific chain of events that is unlikely to repeat due to the structure of today’s economy and modern monetary policy.  From a historical perspective, economic growth and equity returns are strongest when inflation is below 4% and face headwinds when inflation is between 4% and 9% for sustained periods of time. Persistent inflation rates above 9% have been problematic.  While inflationary pressures may persist in the short to mid-term, we find it unlikely that history will define COVID-19 in the context of runaway inflation.

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1. “The history of inflation in the United States”, Toews Asset Management, July 2021, https://toewscorp.com/the-history-of-inflation-in-the-united-states/

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