Is inflation the new market boogeyman? Why are some experts warning of dire consequences that prices are running away?
Many experts are cautioning that the prices in the US are rising too fast, and the Federal Reserve is too slow to address it.
Signs Point to Inflation
Last April 29 new data on core personal consumption expenditures, a key measure of inflation, rose from 1.7% to 3.5% in the first quarter.
PCE, a closely monitored metric by the Federal Reserve, posted its second-fastest pace of growth since 2011. In addition, the Bureau of Labor Statistics released new Consumer Price Index (CPI) data on May 12. The report revealed a 4.2% increase in the all price index before seasonal adjustment.
Data shows that inflation is really rising. The question is whether the rate is rising fast enough to cripple the economy. Or, is it behaving the way the Federal Reserve thinks.
That inflation is transitory and will go down later this year. Experts weighed in on the situation and chose aside. Here are the results:
Side 1: Inflation Is Rising, and the Feds Won’t Catch Up
Mohamed El-Erian, chief economic advisor at Allianz and president of Queen's College, Cambridge, doesn’t agree with the Feds.
In an interview with CNBC, he said he believes that inflation isn’t as transitory as the Fed claims. Rising commodity prices, Warren Buffett's comments on pricing, and rising CPI and core PCE figures back up his claim.
Dr. Wayne Winegarden, senior fellow in business and economics at the Pacific Research Institute agrees. “There is a growing risk of prolonged inflationary pressures.
The Federal Reserve has an untested way of managing the money supply, and I am not confident that they will be able to control the inflationary pressures that they have created with all of their recent actions,” he said. “Add to this problem the intentions expressed by the Fed policymakers that they will not be acting anytime soon, and it is a recipe for strong inflationary pressures and rising interest rates later on in 2021 and into 2022.”
Feds Behind the Curve
Dr. Winegarden said that he’s afraid that the Feds are somewhat “behind the curve” when it comes to fighting inflation.
He noted that the Fed's new monetary policies, including so-called quantitative easing (QE), remain untested. He also finds Fed Chairman Jerome Powell too overconfident in thinking that the agency can control or manage inflation. El-Erian also believes this is the case. He said that the Federal Reserve needs more humility in approaching the issue.
At this point, Winegarden said that the Fed should start ending quantitative easing policies. Instead, the agency is only beginning to consider making a move.
In addition, the Fed continues to look backward at economic data instead of anticipating changes and listening to experts who are seeing inflation on the ground level.
Side 2: Inflation Is A Market Boogeymen
On the other hand, Beth Ann Bovino, a chief economist for S&P Global Economics, said she agrees with the Fed.
She said inflation ties with a “base effect” from pandemic-depressed prices in 2020. Inflation also ties with a near-term boost in prices from supply and labor bottlenecks.
In fact, inflation is being made out as a market boogeyman. In reality, it’s really nothing to worry about. At least for now.
Gautam Khanna, senior portfolio manager at Insight Investment, also agrees with the Fed. “We agree with the Fed's view that the current wave of inflation will be high in the near-term but ultimately transitory.
It is a function of base effects (the CPI figure is being compared to a year ago – during the height of lockdowns), pent up demand and supply chain friction,” he said.
A Deflationary Regime
Khanna told Insider that we are in a “deflationary regime” dominated by three primary drivers: aging demographics, technological innovation, and global trade.
Because of those drivers, inflation will happen between the next two to 18 months. Afterward, deflationary pressures will normalize things. He also said he expects volatility and opportunities for investors to buy the dips.
Eric Leve, chief investment officer at Bailard, also sides with the Fed. “The current bout of inflation will likely prove short-lived.
Inflation is usually the result of utilizing the economy's resources beyond their capacity, thereby needing to bid up the price of those last available resources (labor, machinery, commodities).
This is certainly not the case now. Capacity utilization in the U.S. stands at 74.9%, still far below the 76.9% level pre-COVID.”
Watch the Reuters report saying that Inflation fears weigh on stocks, oil:
Which side are you taking? Do you think inflation is a market boogeyman that is ultimately temporary? Or, do you think we’re not taking the signs of inflation seriously enough?
Let us know what you think. Share your thoughts below.