By: Russ Colbert
Spring 2022 (Vol. 40, No. 1)
We hear an awful lot of talk about inflation these days and who is to blame for it? It is a political hot potato. The result is a great deal of misconception. The CPI or consumer price index that measures inflation is currently up from last year by 7.9%. It could reach 9.0% over the next few months. You hear the blame game from politicians and the media outlets. They try to blame it on greedy companies, Putin, and the War, or COVID-19. As to Putin, the war with Ukraine has caused a temporary spike in oil prices and other commodities. We also believe that the economic environment where labor is becoming scarcer is becoming prone to higher inflation as boomers retire and we have lower fertility, and deglobalization. We believe the most obvious reason is the creation of too much money being thrown into the economy. Many economists believe the inflation increase over the past twelve months is temporary and will come down toward year end.
They also point out that core inflation seems to look tamer. Core prices exclude the food and energy sectors, which normally go up and down. They feel it has temporarily gone up with increases in the M2 money supply. We have also had price increases due to the tanker bottlenecks and supply problems we have experienced with our supply chains over the past six to nine months. As mentioned earlier many economists think these increased prices and inflation will start to come down toward the end of the year as the problems get worked out. This also includes the spike in prices over the last year of car parts, used cars and new cars. We feel we will start to see price drops as car parts and computer chips start to be shipped at the same pace as in the recent past. We will continue to monitor and evaluate all these ever-changing situations. We also believe we will see a series of rate hikes going forward by the Federal Reserve this year to curb increase in the inflation rates that we are experiencing on our goods and services.
There are several forces to analyze and untangle to understand everything that lockdowns, government increases, and spending have done. The U.S. economy was artificially boosted by borrowing money and distributing it through loans and pandemic benefits. This helped increase retail sales by over 25% during the last twelve months, while industrial production was up just over 2%. The U.S. has 1.6 million fewer jobs than it did before the lockdown. The good news is that the spending done in response to the financial crisis and COVID-19 are not all permanent increases.
The U.S. economy grew 5.5% during 2021, the fastest calendar one year growth that we have seen since the boom back during the Reagan boom in the 1980’s. If you look at the past two years, the growth is only up 1.6%. That shows just how hard we were negatively affected in 2020. The government actions and shutdowns of the economic growth has been uneven. Thanks to a boom in investment during 2021, investment was up almost 6% during the past two years. The uneven rate of growth should start to balance out this year and beyond. Currently we are projecting first quarter annualized GDP to come in around 1.5% and to hopefully reach around 3% annualized rate by year end. Our forecast could change on the end of the year forecast based on reports to be released later during the second half of the year. It is a far cry from the great performance of 2021, but not a recession in sight currently.
We expect economic growth to slowly pick up during the year as we move forward. The economy is in a fight between forces boosting growth and dragging it down. We have continued re-opening from COVID-19, and we are still in the process of getting back to normal, but we are not there yet. Monetary policy is still loose. We don’t feel the Fed will raise rates enough this year to stop the economic growth for the year. Tax rates are low and most likely will stay that way. It is also unlikely we will see any changes in legislation that have any major effect on the economy. The economy is facing some negatives including the Russia-Ukraine War and China lockdowns that continued to disrupt supply chains and the Biden Administration continuing to ramp up regulations, increasing business costs. When you add it all up it looks like slower growth ahead, but we should still have some growth and hopefully bypass a recession.
If you have any questions or need a free portfolio review to keep you on track with your investments or retirement plan, please call me.
Senior Portfolio Manager
Advisory services offered through Royal Palm Investment Advisors, Inc., a Registered Investment Advisor.