Should We Be Singing The Inflation Blues?

I'm trying to make a living
I can't save a cent
It takes all of my money
Just to eat and pay my rent
I got the blues
Got those inflation blues

(From “Inflation Blues” by BB King, 1983)

I can't help but wonder what a man suppose to do
I got those hard breaking escalatin' high inflation blues

(From “High Inflation Blues” by Moe Bandy, 1977)

In this article, we continue with our deeper dives into different economic indicators, what we can learn by looking beyond the headline numbers and what those indicators might tell us about future economic and market conditions. In previous posts we discussed consumer sentiment and investor behavior and employment.

This time we discuss a topic that seems to be top-of-mind for many economists, advisors and investors: inflation. When Messrs. King and Bandy recorded their songs in the late-1970s/early-1980s, the U.S. was in one of the worst inflationary periods in its history, topping out at 14.6% in April 1980. We doubt either of those gentlemen would view today’s environment as “inflationary” as they knew it.

But is has been absent for so long that even a whiff of inflationary pressure raises questions and concerns, especially considering the recovering global economy, global easy-money policies and continued massive stimulus here in the United States. So, let’s dive in.

The Headline Numbers

Definitionally, inflation is simply a rise in prices and a corresponding decline in the purchasing power of money. Here in the U.S., the “headline” measures of inflation are the Consumer Price Index (CPI), a measure of the average price of a basket of goods and services, CPI ex-Food & Energy, which removes those two sectors because they tend to be volatile (these may seem ridiculous things to exclude to someone paying more for their gas and groceries), and the Personal Consumption Expenditures Index (PCE), which measures the change in household expenditures over a period of time. The Federal Reserve (Fed) tends to prefer the PCE when evaluating inflation because it accounts for changes in consumer behavior (e.g., substituting hamburger for steak) as prices change.

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