Week Ending May 14th, 2021
Inflation got you down?… Do not worry. The Federal Reserve has a plan or, in Fed speak the tools to help fix it.
What does it mean – The Fed has three main tools in its box.
1. The Hammer – interest rate increases.
2. The Wrench – tapering asset purchases.
3. The Screwdriver – raising the interest rates paid on reserves.
I am just glad the Federal Reserve has a few tools because policy makers in D.C. and the Council of Economic Advisers in the White house are throwing out 1,000 years of economic history and science to follow the path of the “cliff of socialism.” Policy matters and paying people not to work is creating the inflation and small business destruction they refuse to recognize.
CPI and PPI way up… Over the last few months the CPI has increased at an annualized rate of 5.0% while PPI has increased at an annualized rate of 7.4%.
What does it mean – Either everyone that got a stimulus check spent it in the month of March or Welfare is paying better than going to work. Bottom line, both the CPI and the PPI are pointing to higher prices.
Corporate America is already talking up prices… The so-called experts in D.C. say that this time it is “transitory” and will not last and we will soon be back down to normal and non-threatening inflation.
What does that mean – Corporate America is telegraphing higher prices. Manufacturing is already passing on the rise of raw materials and labor.
If you expect stock prices to stay where they are, profit margins need to stay the same. Publicly traded companies are quickly adding in price increases to protect their profit margins. Companies large and small and everything in between are also having to increase wages to attract workers. This is all inflationary and will most likely not be transitory.
Is inflation “transitory?”… The dictionary defines transitory as temporary, not permanent, of brief duration. The Fed and White House Council of Economic Advisors are enjoying a new phrase.
What does it mean – It too will pass is what the Federal Reserve and White House Council of Economics has said. Your question should be, “at what cost” and how will it revert to normal. I love the phrase coined by the Federal Reserve about inflation and what is meant by “transitory.” They said we will get back to a “normal non-threatening level.” First off, who speaks that way? It is either a threat or it is not. Second, how? What actions or inaction will get us back to a 2% level that Fed Chairman Powell wants? Read between the lines – we do not know when, how or what will cause this. We just hope we get there. Unfortunately, taking economic action is much like Newton’s Third Law of Motion – For every action, there is an equal and opposite reaction.
Every man woman and child… FDR used this slogan to energize and unite America during WWII.
What does it mean – Today, 88% of households with children under 17 will get a check every month for every child. Parents with children under 6 will get a check for $300.00 per child every month and from ages 6 to 17 will get a check for $250.00 every month. Nearly 40 million households will start receiving checks regardless of their prior situation before the pandemic. I ask, is this inflationary? Will this be another big government program that never goes away? Is this a new form of Universal Basic Income?
Social security… For years we have heard of class warfare. Just wait. The above issue has led us towards generational warfare.
What does it mean – Can you imagine a world where social security is threatened by an entitlement program designed to go to the youth of our nation putting families on the government doll and pitting grandchildren and children against their parents and grandparents?
We are not there yet.
Always at your service,
Doug De Groote, CFP®, MBA, CTC Managing Director