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Three Steps to Inflation

July 19, 2021

There’s a threat coming for your portfolio – inflation.

Inflation hampers those who live on savings and generate income from wealth. If you planned to earn a certain amount of money per year from investments, that same amount is now worth less.

For years, when governments were printing money, low interest rates and a big money supply set up the conditions for inflation. But it never came to fruition.

I want to point the three sources of inflation that, when combined, can drive prices higher for everyone. They are accommodative monetary policies, expansionary fiscal policy, and a strong economy. There’s no question the first two sources are present, and it seems the third is about to kick in.

Let’s start with monetary policy. You don’t need any charts or stats here. The Federal Reserve is loose with money, and everybody knows it. Measure it however you want, there’s a lot of money out there, it’s easy for corporations, banks, and home buyers to borrow it, and that pushes asset prices higher.

Now, an expanding money supply doesn’t automatically mean inflation. However, money growth in excess of money demand usually does, and this is where the government has stepped up. Fiscal policy can inject trillions of dollars in stimulus, and today, the fiscal valves are open full-bore, and the money is flowing.

All that said, I believe the biggest factor in driving inflation is an incredibly strong economy, and we’re on our way there. Consumer demand has bid up prices on goods, services, and commodities. And a tight labor market is likely leading to higher wages, which raises costs to businesses along with the buying power of workers.

From my view, all three boxes are checked and we’re probably headed for inflation.

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