Is Higher Inflation On The Horizon?

In this edition of Chart Talk, Tony Ogorek and Jeff Viksjo discuss if higher inflation is in the near future.  They use an inflation outlook chart to compare what forces push inflation higher against what forces push it lower to see if inflation will rise.

TRANSCRIPT:

TONY:

Hi I’m Tony Ogorek, I’m here with Jeff Viskjo, and today we are going to try and answer the question: is higher inflation on the horizon?  Jeff, here’s a look at an interesting chart, it takes a look over the next 3 years, 2021, 2022, and 2023 about some of the factors that can be pushing up inflation or rebutting inflation. What do you see here?

JEFF:

I think it’s important to note that the Fed has had this target of hitting 2% inflation for really the last 10 years and they haven’t been able to hit it consistently.  So, that was before the pandemic, and then obviously the pandemic hit, and that threw a wrench in those plans pretty quick.  But now the question before us is, isn’t this the time where maybe we see that higher inflation?  Number one, you have the vaccine rollout and all that spending that has been deferred.  All of sudden, people are able to go out of their homes and spend all that money.  And two, we’ve got all the stimulus getting pushed into the economy.

TONY:

And we have the Federal Reserve saying that they are going to keep interest rates down, do whatever they can to keep them down for the next 2 or 3 years.  So, as you look at this chart, you’re going to see there are factors that augur for higher inflation, but there also are competing factors that are looking at keeping a lid on inflation.  We don’t have a crystal ball in terms of what’s going to happen in the near future, but we do know something about stocks and bonds that people should keep in mind. Right Jeff?

JEFF:
Yeah, and just so our clients are aware, stocks can still go up in an inflationary environment because the companies can simply raise the prices along with inflation, so their value increases with it. But bonds are a different story.  When there is higher inflation that usually means higher interest rates.  Which will hurt your bonds. Which will hurt bond prices.  Which is why we continue to favor equities, despite some higher valuations.

TONY:

So, even though inflation may be increasing, we do think there is a strategy out there to cope with it.  And that strategy, specifically, is owning stocks.  Which can increase the prices of the goods and services, thereby preserving their value.

Hopefully you’ve enjoyed this version of Chart Talk, and we look forward to seeing you next time.

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