Inflation Looming?

2020 is a year I am sure we would all soon like to forget, but the ramifications of the last 15 months will be felt for years if not decades.  Last year the pandemic brought economies across the globe to a screeching halt and sent markets into a tailspin.   In an attempt to stem the bleeding central banks worldwide issued stimulus in unprecedented ways.  Wes reassured Mike and I last year that the Fed was throwing everything they had at it and doing so faster than they had back in ’08-’09.  Well, it worked, in March we ended the longest expansion in history to enter the shortest recession in history.  In hindsight it might have worked too well. I doubt many of us in March would have expected to see markets rebound from -30% to +16% just 9 months later, but here we are.

As part of their attempts to minimize the impact of the pandemic the Fed slashed rates and offered liquidity at a time everyone was selling out.  This helped stabilize the markets but might have had unintended consequences as home sales and refinancing hit levels not seen in almost 20 years.  In our area it was not uncommon to see houses hit and leave the market in less than a week for over asking price after a bidding war.  My mom, a real estate closing paralegal, said that people were buying houses sight unseen at a rate she hadn’t encountered before.  Prices for new homes jumped almost 7% from 2019 to 2020 in large part due to lumber prices doubling their previous highs.

Americans, now stuck at home now with lower expenses after refinancing, nowhere to spend their discretionary income, stimulus checks and a fear of what was to come, started to save money like never before.  In April of last year the personal savings rate climbed to an all time high of 33%, squashing the average of 9% before finally settling around 20%.  Before even the second wave of stimulus checks, Americans held $2.2 trillion more in cash than they had in 2019, and it seems like there is another round of stimulus on its way.

When you put it all out there it’s not hard to see why every pundit is talking about inflation.  As the pandemic (hopefully) enters the 6 or 7th inning, many consumers are going to get back out into the world armed with more cash and lower expenses than ever and with manufacturing and supply chain disruption for over a year there could be far more demand than supply.  So, as Brad McMillan alluded to in his blog we sent out last week, it does appear like there could be some inflation in the short term, though with rates well below the 2% target the Fed has quite a bit of room before they need to act.