Inflation - Is it here to stay?

By Andy Nugent, CFA®

It seems every time I turn on the news these days, news reports about inflation are “all the rage”. Rates are headed north, new and used car prices are up, lumber is through roof, and just look at the gas prices! Inflation is here for the long-term, they say. Not so fast! Let’s take a closer look.

There has been a big concern that rates are headed higher which generally leads to inflation over the longer term. Currently the 10-year treasury yield is at about 1.5%. While that is much higher than last summer when rates were between 50-60 bps, this is significantly lower than the long-term average and rates are already backing off the 1.75% yield seen just a couple of months ago.

When looking at cars, lumber, and gas prices, they are up significantly, but again, let’s take a closer look. Oil has distribution issues due to a shortage of truck drivers which should be corrected by the end of the year and oil distribution should move to normal levels. Lumber mills ramped down production during 2020 due to a lack of demand and now that demand is high. Mills are increasing production and prices are coming down significantly. As for cars, chip production is lagging and therefore new car production is down and demand is up, so prices have followed. Once chip production is increased, car production will follow, and prices should normalize.

While we will see a bit of inflation over the next few years, we believe these sharp increases in many areas are indeed transitory and are simply a result of opening up an economy that wants to spend, but is not ready for the demand. Once the supply issues are resolved supply and demand will balance out.

While, we do see some inflation over the longer term – we see this as an inevitable due to the Government pumping trillions of dollars into the economy, prices are bound to rise.

We believe, however, that inflation won’t be as bad as the news outlets are making it out to be.