June 2021 Economic Dashboard

All major U.S. stock market indices posted another strong quarter of gains as the economy continued to reopen. The confluence of pent-up demand, prior government stimulus, and record household savings fueled robust consumer spending. The pandemic-induced shift in spending to goods continued early in the quarter. Spending began to shift back to services later in the quarter as bar and restaurant spending reached an all-time high in May. Voracious goods spending amid lockdowns on both service industries and goods producers in the past year have driven inventories to extreme lows. The result has been higher than normal inflation.

Inflation simply means rising prices, but economists use several different indices to measure it across the economy. All are showing inflation running at the fastest pace in at least a decade. Market participants and policymakers are especially focused on how long elevated inflation might last. Federal Reserve policy continues to be based on the belief inflation is transitory and will normalize as pandemic-caused distortions recede. Markets are concerned with Fed actions that could be taken to mitigate inflation. Interest rate hikes and money supply reductions have been effective at cooling inflation in the past but can have negative consequences for markets. Despite recent inflation data, bond market inflation expectations have cooled in recent weeks. Inflation is a complex issue, but here are arguments about its potential direction:

Reasons why inflation could be here to stay:

Households built up savings by roughly $3 Trillion since the pandemic began, providing ample resources for future purchases. A multi-year infrastructure spending bill would boost fiscal stimulus. Commodity prices could resume their rise. Fewer people than anticipated return to work, driving sustained wage inflation that businesses pass on to customers. Supply chain issues persist as capacity ramps up more slowly than expected. Inflation becomes a bigger issue in other major economies.

Reasons why inflation may prove to be (mostly) short-term:

Stimulus payments have ended, and extra federal unemployment benefits are due to end in September. Key commodities soared through mid-May but have since cooled. Supply chains will eventually catch up to demand (i.e. semiconductors/autos, lumber mills), as jobs are added and business investment expands capacity. Port and freight shipping bottlenecks will abate, so imports can again serve as an inflation release-valve. Consumers defer or redirect spending away from inflationary areas and towards lower-inflation areas like travel.

Companies with pricing power (the ability to raise customer prices faster than input prices without harming demand) and rising productivity should be able to weather the storms of an inflationary period. The upcoming corporate earnings season will provide insight into which companies and industries have pricing power, and thus will benefit from inflation. We will continue to keep inflation and its potential implications as a central point of focus.

-Jared J. Ruxer, MS

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