Back in May, I wrote an article about the potential path of inflation going forward into 2021 and the near-term beyond. Generally, the belief back then by the Fed and by pundits (such as myself) was that inflation was “transitory,” especially when compared against “base effects.” Where do we stand almost three months later…

Soooo, Preston Caldwell (the Morningstar contributor I cited to in the earlier article in this series), has some minor revisions to his/Morningstar’s forecast, but, generally he (and Morningstar) remain the same. Inflation should be transitory. Why do they still believe this to be true?

A few main reasons permeate their analysis, and they are as follows:

• Auto pricing (new and used) comprises the bulk of excess inflation and it is believed that this supply/demand disconnect will be ameliorated with time as the semiconductor shortage works its way through the supply chain;

• The price of oil will eventually decline from its current near $70 per barrel to a more moderate $55 per barrel (depending upon the US Regulatory climate and production); and

• Wage inflation remains moderate except for hotel/restaurant industries (which have historically averaged about 40% below the average pay for private sector employees).

The above being said, Morningstar, nevertheless, has raised its 2021 inflation forecast to 3.5% from 2.9%. However, they still believe that the core Personal Consumption Expenditures Price Index will average around 2.2% over the next three years starting in 2022. This aligns pretty well with the Fed’s expressed mandate of seeking “to achieve inflation that averages 2% over time.” The key word here being “averages.”

If you have questions about your retirement plan or your investment portfolio in these interesting and uncertain times, please feel free to contact Intelligent Investing at www.mynmfp.com/new-clients for a no-obligation consultation.

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