In a Nutshell

Joe Biden has referred to the latest coronavirus aid package as a “down payment” for dealing with the pandemic.  Another stimulus bill providing more funding for tests, vaccinations, aid to cities and states, plus a third round of direct payments could add up to trillions of dollars!  Why wouldn’t that prompt worries about inflation as well as massive federal deficits.

The U.S. hasn’t seen significant inflation in almost 40 years!  Since the 2008 financial crisis the economy has experienced very low inflation and even some limited deflation.  A moderate level of inflation occurs naturally in a growing economy, yielding slightly higher prices that encourage businesses to invest, as well as wages and interest rates to go up.

Central bank officials have indicated they will tolerate inflation levels higher than 2% to juice the economy and move toward full employment. However, if inflation rises at a faster rate than desired it could be harmful for investors.  Inflation much above 2% could also force the Fed to tighten policy sooner than expected.

“The bottom line is that it will take a long time for average inflation to reach 2%,” Chicago Fed President Charles Evans said last Monday.  “To meet our objectives and manage risks, the Fed’s policy stance will have to be accommodative for quite a while.”  However, others like Bill Dudley, the former president of the New York Fed, made waves last month by suggesting inflation might come back “much more quickly than the consensus suggests” due to pricing differentials as well as the lingering effects of the pandemic. 

As for fundamentals, one of the most important is the global nature of inflation.  The spread of vaccines and end of lockdowns should unleash demand, but it will also unleash supply.  In countries where governments are not as generous in propping up income, production could boom while demand will take time to recover. Weak emerging economy inflation (meaning the lack of inflation) will also likely hamper inflation growth in the US and Europe.  As a rule of thumb, US recessions crush inflation for years and globally synchronized recessions are even more disinflationary.

Regarding global economic growth, it does not look so good in the European arena.  However, Wall Street does not see slow growth spreading to the US.  Bloomberg News reports economists are abandoning European growth forecasts as a new, more contagious COVID strain spreads on the continent and lockdowns tighten.  Double dip recession is now the EU consensus.  EU growth fell in the first and second quarters last year.  Growth returned in the third.  The fourth quarter economic decline is expected to be -1.5%, while the first quarter consensus is -4.1%!  That would equate to a fairly severe EU recession on the heels of a severe drop just last year. The strength of German manufacturing and exports are expected to help the EU’s largest economy escape the Q4 drop.  But even if Germany avoids the recession, the rest of Europe is not expected to be so lucky.

The most successful international and US vaccination campaigns (in terms of percent of population vaccinated) are those with the fewest restrictions. Recently, the CDC urged states to open vaccination to everyone over 65. Fortunately, NY dropped its complicated approach in favor of an aged-based one.  In NYC, the city’s COVID app, which was terrific in directing people to test sites in recent months, tells people where to go for a vaccine shot, but does not indicate who is eligible or how many people can be actually be vaccinated.  Hopefully the vaccination pace will improve in all states once officials settle on a workable plan and execute it.

Nevada (my state of residence) recently opened up an on-line process for older people to get vaccinated soon at multiple designated locations. A reservation is required before anyone can show up to get their first COVID-19 vaccination. This registration process in Nevada is currently limited to those of us over 70 years old.  Several of my neighbors have COVID-19 vaccinations scheduled during the first half of February. This is a good sign that vaccination availability for at least higher risk people will soon be ongoing throughout the USA!