By Joe Higgins
After my BrandSource presentation on the state of the economy last week, my in-box filled up from friends challenging my predictions about inflation being a non-issue.
Watch Joe’s webinar here.
Here is my response:
Inflation is never an easy topic to present or even understand. I have spent years since my college days as an economics major reading about the topic, and there are still dozens of theories I don’t comprehend.
On the surface, inflation is easy: prices rise when there is too much money chasing too few goods. It is the old supply-and-demand equation that we use when trying to understand the future of our economy. On the other hand, inflation is like chasing the coronavirus, through all its mutations — just when you think it is controlled, it breaks out in another form.
When COVID-19 rocked the appliance supply chains last year, supply constraintsforced many wholesalers and retailers to raise prices, but that didn’t deter buyers who kept arriving in your stores with cash. We had high levels of demand and a massive backorder situation at the same time. That is a classic pattern for inflation and results in a rise in prices. It happened across our industries, from appliances to electronics to furniture.
Now, economists, investors and the bond markets are concerned that the new $1.9 trillion stimulus package could spur a challenging cycle of rising prices across the U.S. economy. Prices for homes last year were up 10.2 percent, lumber was up 112 percent, used car prices were up 17 percent, and oil, copper and silver were all up over the past 12 months. So far, the sharp cost increases for these pandemic-popular items have been offset by the savings from buying less clothing, driving and dining out less, and attending fewer concerts and sporting events, if at all.
Now, as the first $1,400 stimulus checks begin arriving in Americans’ bank accounts this week, some fear that too much cashcould overstimulate the economy altogetherand trigger the kind of inflation the U.S. hasn’t seen since the late 1970s.
It is important to keep in mind that Federal Reserve Chair JeromeH. Powell — who has only two mandates, full employment and guarding against excessive inflation — recently said that “The economy can absorb all that money without suffering a hard-to-control bout of inflation.”
It’s a gamble; we are betting the American economy can quickly return to full strength before it overheats, and the Fed will have to raise interest rates. That is the scenario that caused the double-dip recessions in 1980 and 1981. But today we have 10 million Americans still unemployed and millions more underemployed, which is normally a check on inflation.
As I said in my presentation, the Consumer Price Index (CPI) hasn’t hit the Fed’s targeted rate of 2 percent in the past decade. I am not naïve enough to think that inflation can’t move above this level, but the Fed Chair said there is no reason to expect prices to spiral out of control. Powell is the only person in America that has the levers to actually slow down a major escalation in inflation.
However, if inflation was to rear its ugly head and take off, the Fed would tighten monetary policy. And while I don’t think this is ideal, it would hold back prices. I am predicting an extraordinary expansion in the economy in 2021. Bond yields, as I indicated, are up to their highest levels in a year, so yes, you will see inflation. But once we average it over the next twelve months it won’t surpass 2 percent.
Powell has assured all Americans that the Fed won’t raise rates until there’s substantial progress in the labor market and inflation is on track to meet and exceed the Fed’s 2-percent target. That is good enough for me.
Economic analyst and YSN contributor Joe Higgins is a former GE and Whirlpool Corp. exec who brings his 43 years of industry experience to bear as a business consultant and public speaker. Visit his website, Quest 4 Quality with Joe, at www.q4qwithjoe.com.