“Some economists are starting to embrace the idea that a prospective Covid-19 vaccine could allow people to once again spend money on travel, restaurants and other services—and drive up prices in the U.S.,” WSJ writes.
It’s a departure from the past decade when inflation “rarely hit the Federal Reserve’s 2% target despite a strong economy and low unemployment.”
- It could also test the Fed’s new framework, which calls for inflation above expected levels after stretches when it runs beneath.
- The price index for personal consumption, the Fed’s measure of inflation, stood at 1.4% annually in October, just shy of the 2% target.
“The economy’s progress since the sharp, pandemic-induced recession in the spring has made forecasters more confident of a strong recovery once a vaccine enables people to resume their pre-pandemic lives.”
- Airlines and hotels slashed prices in the pandemic, but a struggle to meet a surge in demand could push its price higher.
- The same goes for city rents, which could start “creeping up” again.
- The economy could also get an inherent boost from a large chunk of stimulus money consumers have saved since March.
In the short-term, the economy may experience a temporary boost of inflation for a month or two next spring. Inflation is a measure of year-over-year price changes, and the first wave of the pandemic drove the baseline down.
- The Fed likely wouldn’t react to a short burst of inflation that would eventually subside.
The Longer Outlook: Some economists see inflation running high for extended periods, such as Morgan Stanley economist Ellen Zentner, who predicts inflation will hit or surpass the Fed’s 2% target for all of 2022.
The Bottom Line: Federal Reserve officials have “made clear they don’t intend to raise interest rates anytime soon.”
There are starkly varying expectations for inflation by economists. On one hand, if the economy rebounds aggressively and consumers spend the household savings they’ve been building up, we could see CPI inflation. On the other hand, I do believe that we will continue to see financial asset inflation and that equities and real estate can crunch higher.
Either way, my thesis is that investors will have to settle for lower returns over the next decade than we’ve seen in the previous one, which is why, for discerning investors like us, it’s even more important to concentrate on outperforming sectors and stocks going forward rather than indiscriminately buying market ETFs.