The Back-to-Normal Index fell as low as 57.4% in April 2020. It recently hit 90%. As anyone who has tried to lose weight by dieting or run the 26.2 miles in a marathon, the last 10% can be the most challenging. This is likely to be equally true for the economy.
Looking at official data, it seems that the economy has fully recovered from the shutdown. This simple analysis understates the degree of the problem. Every dollar spent in the economy generally increases the value of GDP by more than a dollar. This is known as the velocity of money. But money velocity suggests economic contraction if you take away government support.
As the economic recovery continues, price pressures are growing. Consumers might call this inflation. The Federal Reserve is choosing to ignore it as transitory inflation. But since transitory effects can last for years, consumers should prepare for higher prices now.
Federal Reserve officials seem to be calm based on public statements. Recently Federal Reserve Chairman Jerome Powell noted that risks are high but under control. It’s likely the Fed will continue adding to its balance sheet since the stock market seems dependent on that. As the Fed warned, lower asset prices could lead to strains in the financial system, and avoiding that is the Fed’s primary concern.
Inflation is increasing, but the Federal Reserve isn’t worried. Officials are confident higher prices are transitory. From an investor’s perspective, we need to hope they are correct. The most recent data showed inflation of 4.2% compared to a year ago. In the past, Consumer Price Index (CPI) readings above 4% have been associated with weak stock market returns. The future looks to be inflationary. The past says that’s bad news for investors.
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