According to Merriam-Webster’s dictionary, transitory means “of brief duration” or “tending to pass away – not permanent”. Federal Reserve Board Chairman, Jerome Powell has repeatedly stated his opinion that any increases in inflation resulting from recent massive fiscal and monetary stimulus programs are nothing to worry about as he believes such increases will be “transitory”. We shall see.
Prices across the board are increasing, and consumers paying those prices could likely care less if the increases are transitory, because they are starting to feel the pinch in the here and now. In his recent annual meeting, the Oracle of Omaha, Warren Buffet said that inflation is real and that his company, Berkshire Hathaway is raising prices because prices are being raised to them, and those prices are sticking. He’s not alone in sounding the alarm as indicated by a tripling year-over-year in mentions of inflation during first quarter earnings calls, the highest increase since 2004 according to Bank of America strategist Savita Subramanian. Raw materials, transportation, and labor were cited as the main drivers of inflation. A few of the companies which have already announced price increases include Proctor & Gamble, Kimberly-Clark, and Whirlpool.
In its latest policy directive, the FOMC (Federal Open Market Committee) voted unanimously to leave the fed funds rate unchanged at the 0.00% - 0.25% range and continue with its monthly purchases of $120 billion of Treasury and agency mortgage-backed securities. At his press conference, Fed Chair Powell said the economic recovery remains uneven and far from complete, that inflation pressures are expected to be transitory, and he downplayed the risk of inflation pressures building like they did in the 1960s and 1970s. He said it will take some time before we see "substantial further progress" in economic activity, and he thinks it is appropriate and important for financial conditions to remain accommodative to support economic activity. Interestingly, Mr. Powell acknowledged that the Federal Reserve is seeing things in the capital markets that are "a bit frothy." Therein lies the rub for investors.
The equity market has been on a moon-shot since it bottomed in March of last year and there are numerous reasons cited for its resilience as economies worldwide recover from their COVID-induced comas. Explanations include widespread vaccinations, lifting of social-distancing restrictions, buckets of stimulus dollars from Washington, very low interest rates from Fed policies, and heretofore, subdued inflation. With equity valuations, as measured by forward-looking P/E (price to earnings) ratios, at twenty-year highs a lot is baked in the cake, so to speak, in regard to future earnings growth expectations. Anything like rising interest rates or increased taxes that might depress earnings or cause a drop in investor confidence could create a reversion to the mean for the equity market. Of course, such a sell off will only create the next buying opportunity for the long-term investor but the conditions that caused it could spell a season of unpleasantness for families trying to make ends meet. Prices at the pump are already up and that acts as a tax to consumers, reducing their discretionary income. Exploding lumber prices are raising the cost of housing and increased prices on consumables can impact consumer sentiment.
With pending tax and debt increases and so much stimulus money in circulation, many are now wondering if the pendulum could be swinging too far in the direction of unwanted inflation. One thing is certain and that is the inability of anyone to consistently predict the future. It is, therefore, especially important during times like these to have a trusted team of experienced advisors on your side and an intelligent financial plan that focuses on your life goals and your ability to achieve those goals.