Inflation, Deflation, Bailouts & Tax Increases! What Should We Expect?

What is happening is unprecedented! Two multi-trillion-dollar bailout packages in less than a year and a third in the works.

Word writing text What To Expect. Business concept for asking about regard something as likely to happen occur - Inflation, Deflation, Bailouts & Tax Increases! What Should We Expect?

The Charlotte Business Journal reports:

“In the past few years, we have experienced three major tax and financial changes that we typically only expect once a decade.

…. This year, we are expecting another major bill (if not multiple) to be signed that may affect how you wish to structure your finances.”

What should we expect?

Keeping score is hard enough; however, the main concern for all of us is what can we do? Should we expect inflation, deflation, a booming economy, a bust, or all of the above?

Dr. Lacy Hunt, co-authors the Hoisington Investment Management Quarterly Review and Outlook. His opening line in the First Quarter 2021 report grabbed my attention:

“Contrary to the conventional wisdom, disinflation is more likely than accelerating inflation.”

Like the old E.F. Hutton commercial, “When Lacy speaks, I want to listen!” It’s always a great learning experience and I asked him to share some thoughts with our readers.

DENNIS: Once again Lacy, thank you for taking your time for our reader’s benefit. Many pundits are predicting inflation. You said:

“Since prices deflated in the second quarter of 2020, the annual inflation rate will move transitorily higher. …. The inflationary psychosis that has gripped the bond market will fade away in the face of such persistent disinflation.”

Our readers probably understand inflation; a rapid escalation in wages and prices. They would see it every time they buy something.

Before we get into predictions, please define deflation and disinflation?

LACY: Dennis, thank you for the opportunity to speak to your readers.

Disinflation is where the rate of price increases slows. Deflation is the special case of disinflation when the rate of price change falls below zero.

DENNIS: So, disinflation is like lower interest rates; whereas deflation is like negative rates? In deflation, prices and wages would be going down?

LACY: Correct, disinflation means the rate of inflation is coming down. Wages and prices may still be rising, but at a slower rate. During deflation, prices and wages are falling.

DENNIS: In your report, you brought up something I hadn’t thought of:

“Restoration of supply chains will be disinflationary. Supply chains were badly disrupted by the pandemic. Low-cost producers in Asia and elsewhere were unable to deliver as much product into the United States and other relatively higher cost countries. This allowed U.S. producers to gain market share.

…. The low-cost producers will want to regain market share while the high-cost producers whose fortunes were unexpectedly helped will try to hold market share. Bottlenecks are widely prevalent at U.S. ports, reflecting the incoming surge of goods. This will lead to price wars.”

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