Post COVID Inflation
The US economy is clearly recovering in 2021. Declining COVID 19 cases, and more and more people getting vaccinated, have meant the lifting of many restrictions. And people in the U.S., just like other nations, want to get back to normal.
But post COVID we now face inflation because the pandemic created the following dislocations in our economy:
1. Labor. Extensive unemployment benefits often pay more than average wages, making it very attractive for people to stay home and not work. Women also find it harder to get back into the work force with schools not fully opened and the subsequent childcare issues. This labor shortage is driving up the cost of wages, services and the products we consume.
2. Supply disruptions. Many companies that produce goods and/or are commodities suppliers had to shut down during the pandemic. But as demand increases with re-opening supply itself has become an issue, causing higher prices for goods and services. We have seen this especially in housing prices, both existing and new builds.
3. Higher Bond Yields/Bond Prices Falling. Massive fiscal and monetary polices are lifting the interest rates.
Inflation is poised to continue globally at the current higher rate as reopening progresses, and until we get back to a normalization in living and company operations.
We continue to monitor future policies out of Washington that may extend the inflation factor further into the future. Over-spending, retroactive and increasing taxes can change the ball game.
Where’s the Fed?
Yes, interest rates have moved up, but the Fed has stated it is comfortable with slightly higher levels of inflation. Fed Chairman Jerome Powell has said that the current signs of a recovery encourage him, although it is not yet complete.
As we focus on the present we can expect the financial markets to be somewhat choppy and unpredictable. This recovery will not be a smooth one, but our philosophy of focusing on companies with a stream of income should help.
Advice from CAIM
Our advice for today’s economic reality?
2. Keep bond maturities as short as possible.
3. Aim for having 6 months - 2 years worth of expenses on hand in case of any emergency.
4. Remain calm, and don’t overreact to market fluctuations.
