Understanding Post-Covid 19 Inflation
There's a lot of anxiety about the recent inflation numbers coming out of the month of April and month of May. The year-over-year comparisons have been pretty stark.
I want to offer some hope that we don't think this is a systemic issue spiraling out of control.
Assessing Inflation Year Over Year
First of all, the year-over-year comparisons are very important with inflation just as with everything else. You'll remember a couple of months ago, I told you that if you want something to feel really good about, go look at the equity performance of your portfolio. That was because your equities were probably up 50 or 60%.
Well, if you go back today and look at the trailing 12 months, comparisons are disappointing because you're only up 25-35% year-over-year. Year-over-year performance in inflation is really, really important.
If you'll recall this point last year in the middle of the worst of COVID – prices were falling because businesses were closing down. The cost of goods was actually dropping because people were trying to clear the shelves and we didn't know where the end was. As a result, we had really low inflation numbers.
Now we've gotten into some inflation numbers, so the year-over-year comparison feels like inflation is running away to the high side. That's being accelerated really by three things.
1. Raw Materials are Trailing the Rapid Recovery
The first inflation accelerator is raw materials production. Raw materials producers of all kinds – logging companies, iron ore, steel companies, those kinds of things.
They've been doing this raw material production through good times and bad in the economy for 150 or 200 years. They know that when a crisis hits it usually takes about 3 to 5 years for the organic demand to get back on trend. They were wrong this time.
We're back to organic trend demand within 15 months. The economy has come roaring back. But they already took their resources and development offline very quickly. It takes them a long time to get production back ramped up to pre COVID levels. That's caused for some of the supply chain delays that we have seen.
2. Complicated Ports and Logistics Add to Inflation
Issue #1 also has bled over into the ports. The changing COVID restrictions make it hard for the dust to settle int travel-reliant industries. Now, take all of that and give it an awful lot of opioids and you get the crisis in the ports.
The ports literally have ships from all over the world with all of the manufacturer products on a tight schedule. They have to figure out how to be COVID compliant with hundreds of ships, tens of thousands of shipping containers on a daily basis.
It's no wonder there has been a real pinch point affecting inflation – they're just trying to figure out the COVID protocols and moving into a post COVID world. How do those ports keep us COVID safe?
3. Old-Fashioned High Demand Driving Inflation
The last thing I'll point out here is this robust demand that I mentioned. We are back to pre COVID GDP growth within 15 months, almost unprecedented and certainly something that none of us saw happening 6 to 12 months ago.
That's fantastic for the economy. It's fantastic for the stock market, but it also creates those inflationary pressures that we're seeing. Don't let one or two numbers distract you or scare you.
If you have questions as always give us a call. Here at Vizionary Wealth Management, we're always here with perspective for the decisions ahead. I hope this has been helpful. If it has, pass it on or tag a friend. Have a great day.