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Inflation is like the Tooth Fairy, no really

Inflation is much like the tooth fairy, whether you believe in it or not it will eventually sneak up on you and steal something from you.

The simile ends here, for sure. Inflation isn’t imaginary, nor does it really care about your teeth, nevertheless adults should care as much about inflation as children do about the tooth fairy. This is because the impact of inflationary pressures on an economy can be considerable and multi-faceted.

Why Now?

More than $5 trillion in COVID-relief packages have become law over the course of the trailing year, with approximately $1 trillion of that distributed as direct payments to Americans. Flooding any economy with new money raises the risk that prices will rise due to the increased demand for goods which are in limited supply.

In just COVID-relief bills, the CARES Act ($2.4 trillion), COVID-19 Relief ($900 billion), and Biden’s 2021 Coronavirus Relief Bill ($1.9 trillion), the United States is printing money equivalent to roughly 25% of its annual GDP. The size of this influx of cash to the economy is of a scale that the United States has not seen in many, many, years, if ever. The relief packages passed come at a cost that is greater than all wars waged by the US since 2001, and greater still than even the most expensive war in U.S. history, World War II.

Measuring Inflation

Predicting inflation is like predicting the direction of the stock market, only the slim few who were correct in their predictions are remembered, and they tend not to be right twice. Still, there is value in reviewing the trends as they emerge, and in order to understand that data, you’d do well to understand the indices we rely on to measure price changes.

The Consumer Price Index (CPI) is the most widely recognized measure of consumer inflation, but the Personal Consumption Expenditure Price Index (PCEPI) is the index used by the Federal Open Market Committee in stating its official inflation target.

The CPI is intended to measure inflation in “out-of-pocket spending by urban households” while the PCEPI is a broader-scope measure intended to understand “growth in cost of the entirety of personal expenditures”.1

Both the CPI and PCEPI are available in “headline” and “core” indexes, the primary difference between the two being the exclusion of food and energy pricing from the “core” index. Given the short-term volatility of food and energy prices, the cleaner measure is the PCEPI because it has been stripped of the “noise” of those price fluctuations.

The Federal Reserve’s top choice amongst these four indices for setting monetary policy and adjusting interest rates is reported to be the core PCEPI index.

If you really want to nerd out, check out the St. Louis Fed’s “FRED” Database at and take a look at the PCEPI core (Ticker: PCEPILFE) and the PCEPI headline (PCEPI), and for extra kicks and giggles, build a chart using the “change from a year ago” units.
Now we’re having fun.

The Give and Take of Inflation

When inflation begins to increase, the positive and negative impacts on households and businesses can be considerable. In the midst of a steady rise in prices and goods over a period of time consumers will do what comes naturally: hoard toilet paper.
Wait, that was last year.

During inflationary periods there truly is a logic to the inclination to buy goods at today’s prices even if you don’t necessarily need those goods now but suspect that you might need them later when they could be higher-priced. In this way, inflation can encourage spending and capital investment.

Unfortunately, higher prices tend to beget even higher prices. As the demand for that limited supply of goods increases, prices often continue to rise.

As inflation takes hold lending becomes more expensive which can stymie investments that rely on leverage, but remember that outstanding fixed debt, like home mortgages or much of the federal debt, decreases in cost for the borrower as the currency in which the debt is denominated loses value.

It’s Not All Bad

It wasn’t long ago (see my previous column) that we were celebrating the prospective post-COVID bump in economic output as predicted in the stuttering leap of bond yields. For all of the risks that inflation may pose to an economy let’s not miss this opportunity to cheer the possibility of the surging economy that could support these inflationary pressures.

According to the Federal Reserve Bank of Philadelphia’s “First Quarter 2021 Survey of Professional Forecasters,” the forecasters expect “real GDP to grow at an annual rate of 4.5% in 2021 and 3.7% in 2022” and the next three years look stronger for U.S. economic output than they did just three months ago.

The same report predicts that unemployment will decrease from 6.3% in Q1 2021 to 5.1% in Q2 2022.


Anthony M. Conte is managing partner at Conte Wealth Advisors based in Camp Hill. He can be reached at [email protected].

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