Inflation has been in the headlines for several months now. January 2022's inflation data just came out and the headline reported is that the Consumer Price Index (CPI) increased 7.5% over one year ago1. This continues a trend of increasing Year-over-Year (YoY) inflation since the middle of 20211. We believe there are several reasons for this.
- Oil prices have been crawling up from all-time lows for the last year-and-a-half. On January 29th, 2021, the WTI Crude Oil Price was $52.16 per barrel. On January 30th, 2022, the WTI Crude price was $89.162. Such a dramatic increase in oil prices have been reflected at the pump, as well as filtering through the CPI numbers.
- Supply chain issues have been all over the news. Ports are backed logged, shortage of truck drivers and other workers, etc. While many supply chain issues have been resolved, or at least are resolving, it will take more time for things to return to "normal".
- The largest factor that we believe has contributed to inflation, is monetary policy by the Federal Reserve. The M2 Measure of the Money Supply has increased over 41% from March 2020 through December 20213. In our view, the root of inflation always comes from the monetary system. When you have more money chasing the same number of goods and services, prices always rise. Economist Milton Friedman is famously quoted as saying, “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”4 The Fed has signaled plans to raise interest rates. We see this as needful but must be accompanied by a reduction or "tapering" of the Fed's Quantitative Easing program and eventual careful reduction in the money supply.
Inflation will likely continue to be a major headline and cause market volatility for the remainder of 2022. However, there are some silver linings in the outlooks and forecasts for inflation. The Fed tracks a 5-Year Breakeven Inflation Rate using the nominal and inflation adjusted Treasury Securities. The current 5-Year forecast of this measure is a 2.81% inflation rate for the next five years5. We will certainly continue to track these measures and the impact inflation will have on the economy and the market.
As always: have a goal, a plan, a strategy, and stay the course.
- U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items in U.S. City Average [CPIAUCSL], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CPIAUCSL, February 10, 2022.
- U.S. Energy Information Administration, Crude Oil Prices: West Texas Intermediate (WTI) - Cushing, Oklahoma [DCOILWTICO], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DCOILWTICO, February 9, 2022.
- Board of Governors of the Federal Reserve System (US), M2 [WM2NS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/WM2NS, February 10, 2022.
- Friedman (1970), p. 24
- Federal Reserve Bank of St. Louis, 5-Year Breakeven Inflation Rate [T5YIE], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/T5YIE, February 10, 2022.