We’re living during interesting times. We just learned that GDP growth during the second quarter was a sizzling 6.6% — even better than expected. Corporate profits surged 9.2% — also much better than expected. It’s not surprising that the stock markets keep setting new record highs. What, me worry?
The Grim Reaper called Covid still hangs over our economy, of course, but we proved our economic resilience to that last year. This year, consumers and investors are worrying more about inflation than the Delta variant. In this space previously, I’ve concluded that neither monetary economics, nor Keynesian economics, nor Supply-side economics suggest the current high level of inflation will be long-lasting. But, all those theories do emphasize the importance of inflationary expectations, which can be a self-fulfilling prophecy. In other words, if people expect inflation, that will actually create inflation. That’s because consumers will accelerate their spending to avoid future price hikes, and businesses will find it easier to increase their sales prices when consumers expect it.
Despite the fire hose of economic data monthly, there is no reliable psychological measure of inflationary expectations, but anecdotally, I am detecting increased conviction that prices will continue to rise beyond any transitory period. Even if so, inflation can always be stopped by the Fed, if they’re willing to create a recession, and I don’t think they are, especially not Fed Head Powell.
Another needed psychological measure is the fear of inflation. Young people with no memory of the 1970’s are surprisingly fearful of something they never experienced. Remember: Don’t forget that a little inflation is a good thing, as it makes our national debt of $29 trillion a little easier to handle or “inflate-away”. Too much inflation brings images of the Weimar Republic, but that was before we knew how to stop it. At this point, you should channel your inner-Alfred E. Newman.