Greg Khojikian is the Founder and CEO of GFF Brokers. He has over 20 years’ experience in the Futures and Forex industry.
A friend of mine owns a small restaurant — his kitchen staff is near full capacity, but he has space to hire a few more employees to make it whole. He’s finding that his workers are demanding higher wages to cover the rising cost of living expenses. Plus, he’s having a hard time finding suitable new candidates for available positions. He’s finding that most applicants are asking for wages that are much higher than what he paid before the pandemic. It’s a challenge that many small businesses are facing — even with nearly 10 million Americans being unemployed.
There’s no doubt that prices have markedly gone up. Part of it can be attributed to supply chain disruptions, pandemic-related or not. Just think of semiconductors, construction materials, paper goods, all the way down to the chlorine for swimming pools and even grocery items like peanut butter. And some of these new costs still haven’t yet hit the consumer to the full extent of their inflationary capacity.
Are we looking at a transitory wave or the undercurrent of a large inflationary swell?
The mainstream pundits, by far the majority, see inflation increase along with economic growth; an “expected” phenomenon that’s more or less controllable. They might argue that inflation is priced into the broader market. It seems like the kind of message you’d get from a typical wealth advisor — one who urges you to keep your money in equities. Ultimately, staying in the market tends to be the message.
Some investors will agree while others simply won’t buy it, they might see inflation as a “tail risk” — a factor that can jump significantly higher than expected. Others might say that the surge in prices is merely an “effect” of inflation but not “inflation” itself, which finds its origin point in the money supply.
So, as you can imagine, it’s a little confusing when seeing the back-and-forth debate between transitory versus long-term price increases when one camp sees inflation as the price surges themselves, while another camp sees inflation as the original cause before price surges become evident.
Is inflationary pain simply part of the 2% averaging gain?
The April inflation rate saw a 4.2% jump between 2020 and 2021 — the biggest CPI (Consumer Price Index) headline gain since September 2008.
Yet the Federal Reserve reiterates its position that inflation is expected to rise and that it’s looking at employment as a critical indicator to help determine its stance toward interest suppression. Plus, wage inflation tends to lag behind price increases. Inflation can’t accelerate for very long without wage increases. All is moving according to the Fed’s plan. So, in short, what’s the fuss? You may be familiar with the “Goldilocks and the three bears” analogy: If inflation is too low, economic growth is growing cold and stale; if it’s too high, the economy’s too hot. You want it “just right,” a figure that the Fed has set as a 2% target.
But you’re looking in the wrong place, say analysts from an entirely different economic school of thought.
It’s all in the money supply, isn’t it?
If you take a more Austrian economic perspective, you might see supply chain disruptions as transitory rather than the result of inflation. Sure, supply chain shocks can cause a drastic spike in prices (in the futures industry, this can cause what is known as “backwardation” — a term for when the cash price for certain commodities sharply outprice their futures counterparts), but are they the real drivers of the inflation we’re just beginning to experience now?
According to this school of thought, inflation is insidiously undetectable to most — it is lurking well before prices begin rising.
Is it really that simple? Should investors simply look to the money supply as a reliable inflation gauge even if the effects of inflation are nowhere to be found? Note that the Federal Reserve decided to discontinue reporting M1 and M2 on a weekly basis, opting instead for monthly reports. Might this reflect on the importance or non-importance of checking the money supply on a frequent basis? It’s something to think about.
What if money printing has nothing to do with it?
Excess reserve deposits don’t seem to be spurring lending by banks. Recent data from the Fed shows that banks are cutting loans overall, despite a 16% increase in deposits.
So, what is inflation?
Clients call and ask simple and reasonable questions like, “How can I hedge against inflation,” or “How might I trade in a way that can exploit the inflationary trend,” or even “Is inflation going to get worse in the long-term?” While inflation is undeniable, forecasting it is tricky — you must be absolutely clear on what inflation means to you, because in order to forecast inflation’s depth, breadth and duration, you have to have a basic assumption as to its point of origin.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.