America's Inflation - Homegrown or global phenomenon?

Annual consumer-price inflation in the U.S. rose to 6.8% in November 2021, a 39-year high. Prices jumped by 0.8% from October. A range of factors have fueled inflation lately including supply-chain bottlenecks, labor shortages, fiscal stimulus and loose monetary policy. Given the persistence of high inflation, let’s look at whether this is a global phenomenon or an isolated issue affecting only the U.S.
 
The Case for a Global Phenomenon

From Britain to Australia, most rich countries face similar price pressures. One common denominator is disrupted supply chains, which have made everything from cars to furniture more scarce and more expensive. Another commonality is the pandemic’s lingering impact on the labor market. On November 19th the head of the European Central Bank said that higher service prices reflect job vacancies in contact-intensive workplaces. These diagnosis applies to America as well. Simply put, life is not yet back to normal and inflation is a symptom.
 
This global perspective is unquestionably important, yet it is insufficient. Inflation is currently higher in the U.S. than in any other advanced economy. To iron out data distortions from the pandemic, we compared prices today with those 24 months ago. On this basis, consumer prices are up about 8% in America which is twice as fast as Europe. See chart “Stimulus Spending and Inflation Spike” for details.

 
The Case for a Homegrown Headache
 
America’s forceful pro-growth policies throughout the pandemic have impacted inflation. Over the course of 2020 and 2021, the U.S. fiscal deficit is on track to average about 14% of GDP, according to the Congressional Budget Office. This is higher than in any other G7 country. The U.S. also spent more stimulus money than any other advanced economy in the world to overcome the effects of the pandemic. See chart “Stimulus Spending and Inflation Spike” for details.
 
The remarkable degree of stimulus helps explain the boom in retail sales in the U.S. There is no doubt that the pandemic has shifted consumption from services towards goods. Yet even allowing for this distortion, the U.S. data is jaw-dropping. In the second quarter of 2021 spending on durable goods was roughly a third higher than in the final quarter of 2019. This far outpaces the increases in other big economies like Britain. See chart “Durable Goods Consumption” for details. In essence, many Americans took their stimulus checks and spent them on goods, driving up demand for items that are often produced overseas.

Indeed, U.S. demand may well have exacerbated global shortages and spilled over into higher inflation elsewhere. Consider maritime shipments. Based on data from the Economist, processing goods through ports in the U.S. was 14% higher in the second quarter of 2021 than in 2019. In other parts of the world, processing goods through ports have been more subdued. Take Europe for example, where throughput was 1% lower. But shipping rates everywhere have soared as capacity has been diverted to transpacific trade.
 
Recognizing that inflation in America stems from its stimulus does not mean that all of those policies were bad. The stimulus prepared the way for a swift economic rebound and a rapid drop in unemployment. Yet, as time goes on, the inflationary dangers have become apparent.
 
What Can Be Done to Lower Inflation?

The U.S. has already taken two measures to reduce the impact of inflation. First, to reduce pressure at the gas pump, the President released 50 million barrels of oil from the national strategic stockpile. Further, the White House announced an action plan to expand port capacity, which could take years.
 
Another lever to offset inflation is to cut government spending. The Hutchins Center estimates that tighter fiscal spending could reduce inflation by 2 percentage points. In addition, Chairman of the Federal Reserve, Jerome Powell, could scale back the Fed’s tapering program sooner and consider raising interest rates.

As inflation continues to rise and the President’s approval ratings continue to fall, pressure will mount as policymakers scramble to get inflation under control. On Wednesday, December 15th, the Federal Reserve, in one of its most hawkish policy pivots in years, said it would double the pace at which it scales back purchases of treasuries and mortgage-backed securities to $30 billion a month. This will put the Fed on track to conclude the program in early 2022, rather than mid-year as initially planned.

Actions to Take

If your investment activity is not generating at least a 7% annual rate return, you are losing wealth due to reduction of purchasing power caused by inflation.

Most of our clients are real estate investors. The team at Safeguard would be happy to discus your current investment holdings and compare them with our first trust deed lending options. 
 
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