Which Way Inflation?
For this month’s Roundup, I’m focusing on the economy. The reason for this is that whenever the economy hits a bump in the road it impacts—one way or another—the world of Accounts Receivables. If you trust pronouncements from the Federal Reserve, we have nothing to worry about in terms of inflation. Federal Reserve Chairman Jerome Powell is predicting a modest 2% average rate of inflation over the next three years. He has described the recent upward tick to 3% inflation seen in the April as “transitory” and merely a sign that the economy is reacting to business getting back to normal. There is logic to that argument, and if this proves true, and inflation beyond 2% is just transitory, we can all sing Happy Days are Here Again, as the economy chugs along on a steady and predictable course.
However . . . Not Everyone Share’s Powell’s Optimistic Outlook
The Wall Street Journal Editorial Board recently penned a piece headlined “Powell Gets His Inflation Wish: The Fed Chairman Wanted Higher Prices. Let’s hope it’s ‘Transitory.’” The Editorial Board clearly doesn’t think higher inflation will be transitory, writing: “The consumer price index rose a remarkable 4.2% at an annual rate in April, and 3% in the core measure that excludes food and energy. Mr. Powell wanted more inflation, and now he’s got it.
The surge in prices won’t surprise most Americans, who have been paying more everywhere from the grocery store to cars to the housing market. … Commodities have also been surging and are feeding into consumer prices. Corn prices are up 50% this year and some 125% year-over-year. Overall food prices climbed 0.4% from March and 2.4% over the past 12 months. Fresh produce and meat prices rose even more.”
The WSJ places the cause of inflation squarely with the Fed, writing: “For more than a year the Fed has been pursuing an expansionary policy for the ages. It has been keeping rates near zero and expanding its balance sheet to record levels with bond purchases in an economy that has been growing fast for more than nine months.” For a good common sense view, here’s what Warren Buffet told his shareholders: “We are seeing very substantial inflation. We are raising prices. People are raising prices to us, and it’s being accepted.”
Remember Stagflation? In May, Consumers Were Acting as If They Did
We don’t hear much about stagflation these days—the combination of stagnant wages + high inflation. A recent article in Barrons suggests that stagflation type anxiety may be behind the surprising drop in consumer sentiment for May, as reported by the University of Michigan.
Morningstar reports “The preliminary estimate of the index of consumer sentiment released Friday by the University of Michigan stood at 82.8 in May, down from 88.3 in April. The reading missed expectations from economists polled by The Wall Street Journal, who forecast the indicator would increase to 90.1.”
Putting those figures into context, Barrons wrote: “The Michigan survey characterized buying conditions for homes, motor vehicles, and household durable goods as the worst since 1980. Actual inflation readings were much higher back then, ‘so these readings are alarming,’ write Jefferies economists Thomas Simons and Aneta Markowska in a client note.” Of course, a downturn in consumer sentiment can be even more transitory than a spike in inflation, but for consumers to be expressing purchasing sentiment as “the worst since 1980” raises concern.
“Increases in Inflation Disproportionately Hurt the Poor”
That’s part of what former Treasury Secretary Lawrence Summers, wrote in a recent piece for the Washington Post titled “Opinion: The Inflation Risk is Real.” Summers writes that the current social/political climate will make it hard for the Federal Reserve to hit the economic brakes in time to avoid problems.
He writes “It is possible that the Fed could contain inflationary pressures by raising interest rates without damaging the economy. But in the current environment, where markets around the world have been primed to believe that rates will remain very low for the foreseeable future, that will be very difficult, especially given the Fed’s new commitment to wait until sustained inflation is apparent before acting.
The history here is not encouraging. Every time the Fed has hit the brakes hard enough to slow growth meaningfully, the economy has gone into recession.”
If Interest Rates Go Up, So Do Borrowing Costs for the U.S. Government
A recent commentary in RealClearPolitics titled “Joe Biden, Economy Killer,” looks at the trillions of dollars in debt the U.S. government already carries, and at the trillions more that have been requested from Congress, and paints a bleak picture for the economy. Again, anticipated inflation is a major factor.
The commentary notes “Rising interest rates created by inflation cause the government’s own interest rates and cost of borrowing to rise. … The national debt stood at about $28 trillion even before Biden’s additional $4 trillion of spending bills, with over $20 trillion of that owed to the public. So every 5% jump in borrowing rates means roughly $1 trillion of added costs per year. In comparison, the total U.S. military budget is less than $1 trillion per year.”
“Inflation Could Spike to 20% in the Next Few Years”—Wharton Professor Jeremy Siegel
Of course, inflation could also remain near the 2% level, or go even lower. But to provide a more extreme view, Markets Insider provides a report on a recent interview CNBC conducted with Jeremy Siegel, Professor of Finance at the Wharton School of the University of Pennsylvania. As with others, he’s concerned with the U.S. government’s massive, and increasing, debt.
In the interview, he referred to Fed Reserve Chair Jerome Powell as “the most dovish” chairman he’s seen. “I’m predicting here that over the next two, three years, we could easily have 20% inflation with this increase in the money supply,” Siegel said. As reported in Morningstar, “Siegel noted that the total money supply in the US has gone up almost 30% since the start of the year alone,” and quoted him as saying: “That money is not going to disappear. That money is going to find its way into spending and higher prices,” predicting that it would “explode into inflation.”
Somewhere Between Powell’s 2% and Siegel’s 20%
Economics is often called “The Dismal Science” because there are so many variables that precise predictions are beyond our capabilities, explaining the old joke “Economists have accurately predicted 12 of the last 3 recessions.” What does all of this mean for the Accounts Receivables industry?
My money is with Warren Buffett, and what I see in my own life. Prices are going up. While I’m hoping that Fed Chairman Powell is right about 2% inflation, I feel as if business planning should be predicated on the possibility he is wrong. Will inflation hit 20% over the next few years? Let’s hope not. But inflation somewhere between 2% and 20% will certainly have an impact on the everyday people we interact with in the AR business.
Ray Peloso, President and CEO of Katabat, brings 25 years of diverse consumer lending experience to Katabat, having held executive leadership roles at Royal Bank of Scotland, Capital One, Citibank, and MBNA. Ray’s prior expertise in consumer credit and lending underpins a clear vision and understanding of the challenges faced by Katabat’s clients in today’s rapidly evolving digital economy.