Richard V. Rupp

June 12, 2021

Happy Saturday, everyone!

 

Have you noticed higher totals on your receipts at the grocery store or at a restaurant recently? Or, that the price of something has not changed, but the size of the box, jar, or can has shrunk?

 

If I were back at my old job of anticipating social and economic impacts to the bottom line for the senior management of an insurance company, I would be writing a report on the anticipated inflation rate.

 

The Federal Reserve and many economists are ignoring the current rise in inflation. My gut tells me that inflation will be well above the Fed's target of 2 percent for the foreseeable future. For example, in May, the Consumer Price Index was 5%. This is the fastest rate increase since the summer of 2008.

 

The core inflation rate, which excludes food and energy costs, was at 3.8%, the sharpest increase in nearly three decades.  Discount stores and fast-food restaurants have dramatically raised their wages in an attempt to hire people. Help wanted ads and signs are up everywhere, which means the cost of labor is going up much more than 2%. And, for some reason, the White House, Feds, and economists seem to believe people will give up their recent gains in the future. Are they nuts?

 

As I draw Social Security benefits, I keep my eyes open for the annual percentage increase. According to Social Security and Medicare, the annual cost-of-living adjustment, or COLA, for Social Security benefits in 2022 — typically announced in October — could be 4.7%, the highest since 2009, based on Wednesday's Consumer Price Index according to policy analyst Mary Johnson of The Senior Citizens League. As most recipients of SS benefits immediately spend them, they will impact inflation.

 

The KIPLINGER LETTER's staff expect consumer inflation for 2021 as a whole to clock in at 5%. In addition, the Letter indicates that "consumers are flush with cash after Congress approved trillions of dollars in stimulus checks and other forms of financial assistance." 

 

Like most industries today, the insurance industry has raised prices significantly during the past few months. According to the insurance industry trade publication the NATIONAL UNDERWRITER, "the insurance industry is experiencing exacerbated inflationary pressures in homeowners and auto insurance lines, stemming from rapidly increasing prices associated with consumer goods and services relevant to the industry."

 

Do you think the prices of lumber and copper pipe and carpenters, plumbers, electrician's wages are going down any time soon?

 

Suppose a national infrastructure deal is reached in D.C., which it looks like it will. In that case, the spending on it will drastically have an upward impact on inflation.

 

While this is good for American manufacturers and workers, it is bad for inflation. In January, Biden signed an executive order to increase federal procurement of U.S.-made goods by tightening "Buy American" requirements. Yesterday, the Biden administration issued guidance to federal agencies to implement the president's "Made in America" executive order. "It requires agencies to examine current Made in America practices . . .These efforts will work together to promote economic security, national security, and good-paying union jobs here at home." And increase inflation.

 

Needed restructuring of the workforce (workplace location, varied hours, and childcare provisions) as the result of COVID will cost money. I suspect lots of it. That's inflationary.

 

The continued impact of COVID on other countries will continue the current supply chain disruptions for some time to come. Maybe years. This is indicated by the recent "chip" shortages, which have resulted in the CHIPS for America Act. As a result, the Semiconductor Industry Association (SIA) has applauded the introduction in Congress of the Creating Helpful Incentives to Produce Semiconductors for America Act (CHIPS for America Act), bipartisan legislation that would invest tens of billions of dollars in semiconductor manufacturing incentives and research initiatives over the next 5-10 years to strengthen and sustain American leadership in chip technology, which is essential to our country's economy and national security. Is the passage of this Act not inflationary?

 

There is nothing on the horizon that I can see to moderate or reduce inflation. The Fed has been basically quite recently, and they are out of ammunition to counter rising interest rates. There seems to be a belief that the recent inflationary trends have been disrupted by COVID and will go back to normal in the near future. Wishful thinking, but not realistic.

 

According to Eric Wingorad, Senior Economist at Alliance Bernstein, "The strength in the top line indices was driven largely by categories that have been heavily disrupted by COVID and remain under pressure from supply chain disruptions. The more persistent categories of inflation – the ones that do a better job of capturing the sustainable trend – are significantly more subdued. That means that the details of today's print continue to support the idea that the spike in inflation is transitory, even if it is more intense than most forecasters (myself included) would originally have anticipated."

 

I believe the reason for so many heads in the sand on this is that the impact of inflation under current economic conditions would be disastrous. With our current and expanding national debt, an increase in bond rates could sink the economy.

 

According to NBC News, "Investors are heavily focused on inflation, which hasn't been a major threat to the U.S. economy since the early 1980s. Unfortunately, I'm one of them.

 

I hope I'm wrong on this. But my gut tells me otherwise.

 

What am I missing?

 

Cheers (or maybe Sorrows),

 

Richard V. Rupp, Author

Website – www.richardvrupp.com

Email – rupprisk@gmail.com

Copyright©2021 by Richard V. Rupp