Consumer prices increased notably in April. It is not yet apparent whether this is a temporary phenomenon or the beginning of a long-term trend induced by an extraordinary fiscal and monetary expansion. But investors appear increasingly uncertain regarding future price inflation; stock markets have been turbulent since the release of this surprising inflation data and bond yields have increased.

Investors should review their vulnerability and preparedness for accelerated price inflation. Just four decades ago persistent, double-digit price inflation wreaked havoc on consumers, investors, and businesses. It could happen again. Though the global economy has changed substantially since the 1970s, growth remains subject to the fate of the current fiat currency regime and the competence of policymakers.

Inflation Front and Center

In recent years price inflation has subsided. Chart 1 (page 34) displays annual consumer price inflation (CPI) since 1972; since 1991 inflation has averaged 2.2 percent and ranged between 0.1 percent and 4.1 percent.

Last month inflation was back in the news. After seasonal adjustment, the CPI rose 0.8 percent for the month, while the core CPI, which excludes volatile food and energy prices, increased 0.9 percent. These were the largest monthly gains since April 1982. Over the past year the CPI increased 4.2 percent. AIER’s Everyday Price Index (EPI) increased 6.1 percent over the 12 months, the fastest such increase since September 2011.

Though these figures may be alarming, no one knows whether this is the start of a longer-term trend. Many prices within these indexes were distorted by supply disruptions induced by the pandemic and the economic shutdown that ensued. These interruptions are unlikely to persist. In addition, this time span compares current prices to a low base level 12 months ago, when prices fell in response to a highly unusual collapse in demand following the economic shutdown. Year-over-year comparisons in coming months may therefore provide smaller increases.

On the other hand, price inflation is ultimately a monetary phenomenon in which there is “too much money chasing too few goods,” and current fiscal and monetary policy have been highly expansionary. As we explained in February, the federal government has massively increased all manner of spending in the name of the COVID relief, while the Fed has been busy monetizing debt by keeping nominal short-term interest rates near zero. (Continued)

Also In this Issue
Why Price Inflation Matters
Inflationary Uncertainty and the Newly Emboldened Fed
Tax Changes Ahead
The High-yield Dow Investment Strategy
Recent Market Statistics
Asset Class Investment Vehicles