Should You Be Concerned About Inflation?

It seems like everywhere you look; prices are going higher. People are paying more at the pump. Lumber at the hardware store is three times more than what it was 2 years ago. Things like the food at the grocery store, clothes, coffee, and housing have all seen price increases over the past year. Used cars are over 11% more expensive than they were a year ago1. Most of us have seen and felt these increases in our lives. Now it is also being reflected in the official government data.

Is this surge in inflation something that you should worry about? The answer to that is not as clear-cut as you might think. There are reasons to worry, certainly. However, there are also signs that the current trend may moderate and it could be healthy for the economy and financial markets.

Figure 1: CPI has jumped recently



The Federal Reserve (Fed), in its most recent statement, stood by its position that current inflation pressures are temporary (or “transitory”).  They did not make any changes to policy because there isn’t enough evidence to suggest these rising price pressures will persist.  For example, the rising price of lumber is believed to be largely due to supply bottlenecks that should work themselves out.  Those prices have already begun to subside from their recent peak

Figure 2: Lumber prices are still elevated but off their peak.

Also, notice that the official gauge of inflation measures a 12-month change in prices (see figure 1).  Prices today are being measured against prices which, one year ago, were during the midst of a global economic shutdown.  There were many reasons prices were lower in that environment.  For instance, gas prices are much higher than a year ago but not much higher than two years ago.

Figure 3: Gas Prices Rising This Year

There has also been a lot of stimulus money going to consumers which have amplified demand in many areas.  Once those benefits work through the system demand pressure could ease.

The Negatives

It is not usually the inflation that crushes the market.  It is the response to inflation that markets do not like.  The economy is like a giant engine.  If it runs too slowly, the Federal Reserve tries to rev it up by doing things like lowering short-term interest rates and buying bonds on the market to add money into the system.  This is like adding fuel to the fire to get the economic engine running hotter.  If that engine starts running too hot, it risks overheating.  In that case, the Fed will do things that cool the engine down, like raising short-term interest rates and selling bonds into the market to make money out of the system.

The best example is the 1970’s.  Inflation started picking up and it took drastic measures by Paul Volker and the Fed in order to get it under control.  He raised short-term interest rates to over 20% in an effort to stop inflation.  This was like pulling the emergency brake on the economy, causing a recession in the early ’80s along with a 25% correction in the stock market.


Figure 4: Short-term interest rates peaked around 1980


The Positives

Modest levels of inflation can be a positive force for the economy.  Right now, price pressures appear to be manageable for most consumers.  The consumer base has seen their house values rise, cost to borrow stay low, debt levels drop, savings rate increase, and finally, have received stimulus checks from the federal government.  Plus, many of these consumers have been suffering from a severe case of cabin fever and are ready to get out and use some of that substantial purchasing power.  While supply costs for many companies are increasing, they have the ability to pass those costs on to consumers through higher prices.

Inflation can stoke demand from otherwise undecided consumers.  If people think the price of a new car will be higher next year, they may be incentivized to buy it now.  That pulls consumer demand forward which can lead to further economic activity.  (The car salesman hits his sales quota, earns a bonus, and takes his family on a nice vacation, for instance.) Moderate levels of inflation are considered a healthy part of a growing economy.

The Bottom Line

While official reads of inflation have been increasing, some of those pressures will prove to be transitory and others will be manageable.  The Fed is holding its hand for the moment but has recognized the increasing trend.  We believe a continuing trend of increasing inflation is not a bad thing but something to monitor.

Our response to the expectation of increased inflation has been to hedge our bond portfolio from some of the risk using Short-Term Inflation-Protected Treasury Bonds.  We have also rotated our stock portfolio back towards more cyclical value-oriented funds which tend to do better in inflationary environments.

Please contact us if you have questions.  You can call or visit our website for additional information.  We love to get your feedback.

Have a happy and healthy summer!

Keith J. Akre, CFA, CFP® – Vice President & Trust Officer

Opinions expressed are solely my own and do not express the views or opinions of Stillman Bank. Investments available through Stillman Trust & Wealth Management (1) are not FDIC insured (2) are not deposits, obligations, or guaranteed by the bank and (3) are subject to investment risk including possible loss of principal.

1Bureau of Labor Statistics,