How do you feel about inflation?

An answer may be found through the New York Fed’s Survey of Consumer Expectations.  This monthly survey, as discussed in Inflation Is All the Rage- Episode V, decreased to 5.8% in January from 6.0% in December.  The decline may be encouraging, but the numbers are still the highest recorded since the survey started in 2013.  It is also indicative of people on the street believing prices will continue to rise.  With tensions in Ukraine spilling over, prices in general are likely to go up further.

Perhaps there is something afoot regarding inflation.  My friend and FourStar advisor Fred Crossman posted a great piece in his Collar Stocks blog- What Is Inflation Really, The Hidden Tax That Affects All Of Us?.  He gives a fundamental explanation by economist Milton Friedman, who concludes inflation was always produced by high public spending and a growth in money supply.  Just look at the chart in his post- talk about a picture worth a thousand words!

A decline in the value of a currency is a hidden tax on the people holding the currency.  Let’s bring this thought home, as inflation continues to rise, the impact of the $1 trillion dollar infrastructure law diminishes- this is the plan designed to invest in roads, bridges, railways, electric chargers, and resiliency to the grid.  Most components of infrastructure projects, like the cost of materials, supplies, transport, and wages, have all risen faster than inflation in general.

Here is another gauge on the ability to control inflation- look at total debt as a percent of GDP.  The total current public debt to GDP is about 120%– and, as we mention in a recent Today’s Market Explained (at about 24:05) podcast, that amount equals an astounding $30 trillion in national debt!  The ratio has hovered around 100% since the fourth-quarter of 2012 and hit the current level during the response to the pandemic.  For context, the last time debt-to-GDP hit 100% was at the end of WW II.

Why is the debt-to-GDP ratio important?  The government mostly finances our national debt by rolling over short-term treasuries, so any rise in interest rates will directly increase the cost of maintaining the debt.  On a household level, it’s like rolling debt that can’t be paid off onto credit cards when interest rates are rising.  We know how that can bite!

Enjoy this piece from economist John Cochrane in the Chicago Booth Review for more context on how debt-to-GDP can affect the ability to manage inflation.  Let me know what your thoughts are.

~ Brian Kasal- The Leadership Matrix

Click here- What Makes It Hard to Control Inflation

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