As inflation expectations begin to accelerate and long rates begin to rise, I thought I would review my thoughts on inflation and rates from previous articles and the Outlook 2021.
One of the basic definitions of inflation is “too much money chasing too few goods.” With the mailbox money from 2020 increasing money supply and supply chain disruptions causing scarcity of goods, it is no surprise that we would get some pressure on prices. After all, how can $1,000 buy the same amount of goods if we have $1.40 for every dollar in the system.
Another contributor to inflation is higher wages. With higher wages it is thought that employees will have greater disposable income thus the ability to pay higher prices. However, with higher labor costs businesses need to increase prices is this just a vicious circle. The talk of raising the minimum wage is trickling through inflation expectations which is yet another contributor to inflation, the expectation of inflation has a chain effect.
As the federal debt is piling up, rates on the long end are rising to attract capital. From where? Equities! Look at the differential in interest rates and dividend yield on stocks that we have pointed to over the past year. It is telling us something is mispriced. I don’t think we have enough evidence to suggest this is the beginning of something bigger than an adjustment of asset allocation. Fortunately, Astor has the tools to analyze the data in our now cast index the Astor Economic Index®.