Inflation Or Disinflation?

Several positive developments over the last several months have dramatically improved the near-term outlook for the economy. Accelerating vaccine rollouts, increasing business activity, continued monetary policy, and substantial new doses of fiscal spending contribute to the potential for higher economic output. All these factors, however, are also increasing concerns about inflation, and rightly so.

The good news is there are plenty of commentaries that provide valuable updates and insights for investors to monitor the situation. The less good news is there is no easy answer to the debate between inflation and deflation/disinflation. A significant challenge, then, is figuring out how to incorporate an uncertain path for inflation into an investment strategy.

National flag of United States of America on background and dollars falling down



One of the interesting characteristics of commentary about inflation (or most investment topics, for that matter) is the one-sided nature of arguments. Most commentaries make a pitch, for or against, and rattles off as much supporting evidence as possible.

Another interesting phenomenon exacerbates this tendency: There seems to be competition to produce the cleverest insight. Such is understandable to a large degree since authors are keen to build their reputations based on insights that prove to be correct. However, the very notion that there even exists a “right” answer from which attentive investors might reap a windfall belies the grinding uncertainty of an issue like inflation.



We can observe these characteristics in the arguments for inflation. Arguably the most common view for inflation is massively increasing the money supply. Anyone looking at a money supply chart would wonder about its sustainability.

There are many different permutations of this theme. One view relies to some degree on faith that vast piles of money will eventually find their way into the economy but is agnostic as to how that happens. Another view is that governments will increasingly get involved in the lending process (by backstopping loans, for example), which will significantly ramp up the speed of the money creation process. Both get supported by a longer-term historical perspective that points to inflation as the preferred manner by which to manage excessive levels of sovereign debt.

As is often the case, these arguments are compelling. If you listen to a few of these reports and then observe food and gas and lumber prices going up, it is easy to start getting nervous about any cash you may have lying around.


The arguments for deflation/disinflation are also highly compelling, however. One of the more prominent commentators in this camp is Lacy Hunt at Hoisington Investment Management. His case is straightforward, as he reveals in Hoisington’s first-quarter review:

1 2 3 4
View single page >> |

Disclaimer: Click here to read the full disclaimer. 

How did you like this article? Let us know so we can better customize your reading experience.


Leave a comment to automatically be entered into our contest to win a free Echo Show.
Norman Mogil 3 weeks ago Contributor's comment

What replaces the 60/40 split?