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Expectations

11/11/2021

Veterans of President Gerald Ford’s “Whip-Inflation-Now” campaign in 1978 tend to see inflation hiding behind every tree.  Wednesday’s CPI report of 6.2% price increases over the past twelve months vindicated their suspicion.  After all, it is the highest inflation rate in 30 years.  While that concerns me, it does not worry me.

If you believe in monetary economics, where increasing money supply causes prices to increase, then you are not worried, because the tsunami increase in money supply is already draining off.

If you believe in Keynesian economics, where increases in demand or decreases in supply cause prices to rise, then you are not worried, because capitalism is well-suited to “fix” the supply chain within a reasonable time.

However, we have mentioned several times in this space that consumer expectations of inflation are the prime determinant.  If people believe prices are going up, they might buy now, before prices rise, creating even more demand for essentials and less demand for non-essentials.

What does worry me is Tuesday’s survey by the Fed showing consumers near-term inflation expectations rose from 5.3% to 5.7%, the highest since 2013.  The Fed would say that “inflation expectations may be less anchored.”  The good news from the survey showed that three-year inflation expectations held steady at 4.2%.  While  that rate is unacceptable in the long-run, it does lend credence to the short-term strength of the current inflation, decreasing over the next three years.

One final thought to remember is that all “flations” are not created equal.  Deflation is much harder to control than inflation. Now, aren’t you glad we have inflation?

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