W are seeing inflation. We’re seeing it at the grocery store and most certainly at the gas tank. One year ago, Energy was the worst performing sector when oil was $25 a barrel. Now, Energy is leading the sectors, up nearly 40 percent year to date, and oil is $65 a barrel. It is easy to see inflation when comparing to year-ago lows. We haven’t seen double-digit inflation since the early ’80s, when today’s 50-year-old investors were 10-12 years old — they lived through it but never really experienced it.
Compared to the 2008-2009 recession, our current economic conditions are very different. Understandably the fear is that this time, the large amounts of money being injected into the system whether via stimulus checks or bond purchases, will lead to inflation. But the Federal Reserve believes what we are seeing is transitory inflation — price increases temporary in nature and a direct effect of suppressed commodity prices early in the pandemic now creating a base effect.
In 2008-2009, the Fed was aggressive with quantitative easing and increased the monetary base, which is the feeder for the money supply. However, banks held on to the money — and were incentivized to do so thanks to the Fed paying interest on bank’s excess reserves. This time, we essentially have “forced lending” in the form of PPP loans and direct stimulus to the consumer. Couple that with the supply chain shock, and that creates the risk of inflation a little more now than we’ve seen in recent years.
Disruptions to the supply chain began in China in February 2020. As the global economy shut down for the pandemic, the vulnerabilities in the supply chain were exposed with shortages of pharmaceuticals, medical supplies, and household products. The supply chain generally involves raw materials, contract manufacturers, specialist subcontractors, third-party testing facilities, inventory warehouses, and freighting companies. A lack of workers can slow down any one of these steps causing delays.