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Thoughts about Inflation
After being called "transitory" in 2021, Inflation has proved to be more persistent in 2022.
May 2022
After being called “transitory” in 2021, inflation has proved to be more persistent in 2022. The impact of inflation and the rising interest rates used to control it can be significant.
Gregory Prato, the CEO and Chief Investment Officer of Prato Capital, recently had a great discussion about inflation with Apollo Lupescu, Vice President at Dimensional Fund Advisors. A recording can be found on YouTube, www.youtube.com/pratocapital, and on our website, https://pratocapital.com/videos/.
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Inflation and the Federal Reserve
A recent Gallup poll highlights that most Americans feel their personal financial situation is getting worse and inflation was named the biggest concern¹. We have all seen the impact of inflation at the grocery store or when filling our tanks at the gas station. If we are still working, we have seen wages fall behind rising prices leaving less for discretionary spending or saving for future college costs, housing changes and upgrades, and retirement. For those already in retirement or on a fixed income, rising costs are especially worrisome.
The inflation rate has been relatively low since the early 1980s with most years seeing rates between 2% and 3%. According to the US Bureau of Labor Statistics, the Consumer Price Index rose 7.0% in 2021 which was the “the largest December to December percent change since 1981.”² According to the Federal Reserve Bank of Cleveland, a rate of 2% per year is “the right amount of inflation.”³
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One of the ways the Federal Reserve controls inflation is with interest rates. When inflation becomes higher than the ‘right amount’, interest rates will rise in an effort to slow the economy. In March, the Federal Reserve started raising interest rates and many of the Fed Board of Governors have been quoted as seeing the need to continue raising rates for the foreseeable future. The financial media has focused on rising interest rates slowing the economy too much and the possibility of a recession in the United States over the next couple of years. Our March blog discussed this possibility and what we are recommending to investors and to our clients.
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