Falling Inflation is Problematic

Downtrends in CPI and PPI

Inflation is one of the most important economic metrics. It drives the cost of everyday spending for millions of people and decision-making at the highest levels of monetary policy.

Following the extensive program of quantitative easing after the Financial Crisis, inflation was expected to rise significantly with all the money printing. That never happened.

Fast forward to the recent extensive stimulus programs in response to the pandemic and the same rising inflation narrative is playing out. But, we still aren’t seeing inflation actually go up:

The long-run trend is clear. While near-term stimulus is certainly possible and could finally change the trajectory, don’t bet on it. Most of the talk from the Federal Reserve has been in favor of more fiscal stimulus, stating that it would be difficult to overdo it. Unfortunately, the political appetite for more relief is weak.

What does this mean for investments? Well, commodities (particularly gold), that are supposed to do well in an inflationary environment, may not do so well. We saw the same thing after their run up peaked during the Financial Crisis when everyone realized inflation wasn’t going to happen.

With low inflation, the Federal Reserve is unlikely to raise rates for some time. So, expect stocks to continue to do well.

Expect housing prices to continue to increase as low rates continue. The conundrum here being that, while inflation is ticking down, housing has become increasingly unaffordable.

And then, in terms of wealth inequality, the aforementioned situation just exacerbates the problem, as many Americans primarily build wealth through home ownership and the stock market, which are both becoming relatively more expensive due to the resulting ongoing gains.

Falling inflation create a tough place for policy makers to be in. And, the pandemic continues to make matters even more complex. Altogether, it makes for a huge set of metrics that will be very interesting to watch in the near future.

More Metrics

Monthly inflation continues to fall

Policy uncertainty remains elevated

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