Inflation Pressure
Every time I get ready to ride my bicycle, I check my tire pressure. Riders will know that this routine is common and smart. Tire pressure can influence speed, control, and comfort. My road bike tires like to be inflated to 110 psi (pounds per square inch) while my mountain bike tires are different. Since the terrain is different for each mountain bike ride, the tires may be set as low as 35 psi all the way up to 55psi. Softer tires are more forgiving… my wife has a “fat tire” bike with tires that are set around 25psi. Talk about a comfortable ride! Inflating your tires to the correct pressure influences your ride and is essential to a safe and enjoyable bike outing.
Recently, the subject of inflation has resurfaced. As the economy continues to rebound from the Covid-19 pandemic, prices for certain goods and services have increased. Lumber prices have jumped, partly due to less supply but more importantly from strong demand. We have all heard that housing prices have increased, particularly in suburban areas, as individuals working from home want more room. Yesterday, I read that ketchup packets are 13% more expensive than one year ago. Why? All of those takeout orders have caused a surge in demand. Whoever would have thought that ketchup packets could be an economic indicator?
The Federal Reserve sets short term interest rates to influence our economy thereby influencing inflation. The Fed’s focus is two-fold: price stability and maximum sustainable employment, known collectively as the "dual mandate.”1 Maximum employment is an obvious goal. More people employed translates into more money earned and more spent by more confident consumers.
Price stability is a far trickier goal, and inflation is the common measure for this specific objective. What is inflation? The Fed says it best: Inflation is the increase in the prices of goods and services over time. Inflation cannot be measured by an increase in the cost of one product or service, or even several products or services. Rather, inflation is a general increase in the overall price level of the goods and services in the economy.2
For the last 30 years, inflation as measured by the Fed has been around 2%. Coincidentally, economists agree this target is a “good” level or “safe” inflation. More recent data indicate however that our economy experienced rates above 2%. Economists and investors have expressed concern. Will higher inflation be sustained? How high will it go? How fast? These are legitimate concerns, as higher inflation erodes your purchasing power.
Here is another way of looking at our current situation: a faster moving economy is a more dangerous road, a rockier terrain, with higher inflation rates a possible outcome. As our speed increases, our ability to control our path diminishes. Finding a happy medium for expansion without too much inflation will be a challenge, in my opinion.
I feel compelled to add that the task of the Fed is not an easy one. Figuring out the right inflation rate for a given economic environment is much more difficult than inflating a bicycle tire. The road ahead appears promising, but let’s keep our eyes wide open for the detours, speed bumps, and other obstacles that threaten a safe journey.
Ralph McDevitt April 9, 2021
1 Federal Reserve Bank of Chicago
2 https://www.federalreserve.gov/faqs/economy_14419.htm
Any opinions are those of Ralph McDevitt and not necessarily those of Raymond James. Raymond James & Associates, Inc., member New York Stock Exchange/SIPC
