Inflation Crashes The Party

It’s dawning on many investors that our post-Covid financial problems may not be as easily solved as Washington claims.

The latest clue that trouble is brewing has come from the sudden and dramatic arrival of inflation. On May 12, it was revealed that the Consumer Price Index (CPI) had risen 4.2% year-over-year, the fastest pace since 2008.

Some tried to downplay concern by pointing out that the gains resulted from the “base effect” of comparing current prices with the artificially depressed “Covid lockdown” prices of March and April of last year. But that ignores the more alarming trend of near-term price acceleration.

According to the Bureau of Labor Statistics, in every month this year the month over month change in prices has been greater than the change in the previous month.

In April prices jumped .8% from March, versus an expected gain of just .2%. Clearly if this trend continues, or even fails to dramatically reverse, we could be looking at inflation well north of 5 or 6 percent for the calendar year. That would create a big problem.

Despite Federal Reserve officials’ recent assurances that the inflation problem is “transitory,” many investors are concluding that the central bank will have to deal with this problem by tightening monetary policy far sooner than had been expected. This would make sense if the Fed cared about restraining inflation or, more importantly, had the power to do anything to stop it. In truth, we are sailing into these waters with little ability to alter speed or course, and we will be wholly at the mercy of the waves we have spent a generation creating.

Since the era of central bank activism kicked into high gear in 2008, with the quantitative easing programs created in the wake of the Financial Crisis, the U.S. economy has largely avoided the spike in consumer prices that would typically result from monetary stimulus. It is my belief that the injection of trillions of new dollars into the economy merely offset the downward trajectory of prices that should have occurred during a severe recession. But more significantly, the money the Fed created at the time flowed more directly into assets rather than consumer goods.