As the dust settles and we learn to adjust to life alongside COVID, many of us find ourselves asking “What is next?”. It may be time to dip your toes back into traveling, reunite with family and friends or return to the workplace. After a year that saw extreme highs and lows, investors are pondering the same question: What now?
COVID’s Economic Curse
The coronavirus’s impact on the economy continues as the Delta variant surged through the summer. Fear of the uptick in the COVID spread, coupled with supply chain issues that have affected consumer’s shopping lists, has slowed economic growth from August to September, according to a IHS Market study. According to the same study, manufacturing and service businesses both reported slower growth in activity over the last month as well. The service sector was impacted not only by fear surrounding Delta, but also increased costs when it comes to ordering products and hiring workers. Although we believe the economy will work through many of the COVID kinks, it will take patience to see it through.
Is Inflation Here to Stay?
Inflation has been the hot button topic of 2021, as economic scholars grapple to decide if “transitory” inflation is really as fleeting as initially believed. The headline Consumer Price Index (CPI), which measures the changes in prices of goods and services, has climbed from 1.3 in September of 2020 to 5.3 at the end of September 2021. This change has sparked concern surrounding the long-term impact on the economy. But if we examine the reasoning behind this jump, this concern dwindles.
Currently, inflation is driven by products as they recover from the effects of the pandemic. It started with out-of-this-world lumber, steel, and concrete prices, as the available supply couldn’t keep up with demand as folks returned to remodeling their homes. The pricing fluctuation then bled into the used car market, where the production of chips (or lack thereof) will now force you to pay a premium to get your hands on a new car. Currently, the rental market is having a major impact on CPI, as it works through the impact of COVID stimulus programs.
Although prices have hit a 13 year high, there is a major piece of the inflation puzzle that is missing: the velocity of money. Simply put, the velocity of money is the rate at which money changes hands within the economy. For inflation to be long lasting, consumers need to be actively bidding up the prices of goods and services, which would be reflected in a rising velocity of money. As shown below, the current velocity of money is at an all time low. Because of this, inflation is not being driven by consumer spending, but rather because of supply chain bottlenecks created by the pandemic.
The Absence of the Velocity of Money
As a result of the change in inflation, the Social Security Cost of Living Adjustment (COLA) is predicted to be 6% for 2022, the biggest increase since the 1980s. We have been covering the economic impact of inflation in our recent Inside the Economy video blogs. Click here to learn more about the current inflation cycle.
Q3 2021 News from the Federal Reserve
The Federal Reserve had a few announcements as they wrapped up their latest meeting. First, they expect to begin tapering the pandemic stimulus programs as early as the first week of November. The Fed has been buying up assets at a rate of $120 million per month in order to support the economy as it navigated through the COVID era and plans to slow purchases later this year, before reaching a full stop by summer of 2022. The other takeaway is with higher-than-expected inflation, we may see interest rate hikes sooner than expected. Originally, we were skeptical that we would see rate increases until at least 2023, but if post-pandemic inflation sticks around, Powell indicated there is a possibility we may start to see interest rates rise in 2022.
“Patience is one of the Most Valuable Attributes in Investing”
Although it may be easier said than done, the above quote by Marty Zweig, an influential investor, is a mantra to adopt as the economy continues to work through the aftermath from the pandemic. Both in life and investing, there have been many ups and downs over the last few years and it takes patience, intention and a long-term focus in order to persevere.
Get Your Q4 Investments On Track
Whether you are continuing to weather this year’s economic storm or looking for a fresh start with your investment portfolio, SHJ has 8 CERTIFIED FINANCIAL PLANNERS™ ready to get you on the right track.