A recent Harvard-CAPS-Harris poll reveals that Americans are concerned about inflation, but are increasingly optimistic about the economy. Fifty-six percent of respondents believe the economy is strong and their personal finances are improving.

Americans remain concerned about inflation. Prices rose 5% in May, the strongest year-over-year results since 2008. Excluding volatile food and energy costs, prices were up 3.8% from the previous year. last year.

Due to bottlenecks and high consumer demand, prices have increased for many goods and services such as gasoline, airline tickets, homes and used cars.

Are our higher-than-expected price pressures a reflection of short-term factors or are they representative of long-term factors? Economists and policy makers remain ambivalent on this issue.

The answer to the sustainability of inflation has ramifications for both the average person and the investment community. Inflation erodes purchasing power. A temporary price spike will not cause lasting damage to purchasing power. On the flip side, if Federal Reserve officials believe we need to prevent ongoing inflation, they might reduce their support for the economy. Historically, the Federal Reserve has supported the economy by keeping overnight funds low and buying government securities.

For the following reasons, the Fed estimates that in 12 months, inflation will not exceed 2%:

· Five short-term components are primarily responsible for our recent price hike: used cars, rental cars, accommodation, airline tickets and food outside the home.

· The current unemployment rate in the United States (5.8%) is still a challenge.

In April, the percentage of our workforce (25-54) employed was 76.8% compared to 80% before the pandemic.

· The Atlanta Fed compiled a list of sticky prices (the ones that didn’t move often). Sticky prices have risen a modest 2.4% in the past 12 months.

· Globalization has provided cheaper access to supplies and labor.

· Slower population growth and an aging population have reduced demand.

· Technology disrupting businesses such as online shopping and virtual conferencing has held back price increases.

· China, the world’s largest user of coal, steel, iron ore and copper, decided in May to curb “unreasonable” price increases and thus prevent them from being passed on to consumers.

The low interest rates from our central bank boosted the stock market. Warren Buffett hit the nail on the head when he said: “Interest rates are to asset values ​​what gravity matters and the short-term Treasury bill rate is really nothing today. hui. ” Our current overnight rate is only 0.07%.

In March 2020, the Federal Reserve launched an aggressive quantitative easing policy involving the purchase of government securities, corporate bonds and other financial instruments to keep interest rates low and stimulate the economy. The Fed has started buying corporate bonds in order to thaw out the struggling bond market. American companies faced major financial problems because they could not borrow new funds or refinance their current bonds.

For now, the Fed will continue to buy $ 120 billion in treasury and mortgage securities monthly. However, starting this month, he will sell his holdings of corporate bonds.

Currently, the stock and bond markets are signaling that the consumer inflation rate, which now stands at 5%, is transient.

The S&P 500 recently hit an intraday high as investors juggled signs of a rapid economic recovery with concerns about the Federal Reserve’s reduction of its massive monetary stimulus.

The benchmark 10-year Treasury yield recently fell to 1.47%, down sharply from its May high of 1.74%.

In 1955, William McChesney Martin, Chairman of the Federal Reserve, said he was “in the position of the chaperone who ordered the removal of the punch bowl just as the party was really starting to heat up.”

I am not a party animal. We can keep our punch bowl but we fill it with sparkling water!

Sarasota resident Ernest “Doc” Werlin spent 35 years in the fixed income industry as a corporate bond trader and seller, including time as a trading partner at MorganStanley. corporate bonds. Send your suggestions and comments to [email protected]



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