First published on linkedin.com 10th of May 2021

Perfect storm for a distorted inflation number:

1. Low base one year ago.

2. Supply chain disruption due to the pandemic.

3. Global chip shortages.

4. Monetary and fiscal stimulus that’s ongoing.

5. Strong recovery

6. Temporary supply shortages like air tickets, due to current rules and regulations.

7. Estimates have been missing the mark lately for most data.

Notable:

1. Things that drive inflation over a longer period of time like housing and price of services showed increase consistent with where they have been over the years.

Shelter cost increased 0.4%
Services excluding energy is up 0.5%

2. What went up?
Airline tickets up 10.2%
Hotels up 8.8%
Used car price up 10%
Note that the above items are all “wants” and not “needs”

If it gets too expensive, consumers can cut down on the above and demand will reduce over time. With the travel industry opening up expected, supply will definitely increased and thus, prices fall as demand slows and supply goes higher.

3. Consumers around the world have stockpiled an extra $5.4tn of savings since the coronavirus pandemic began. One example, Japan stimulus has gone into savings rather than spending.

Similar events has happened in the past. Post 2008 GFC, and the sovereign debt crisis in 2011, central banks have employed monetary and fiscal stimulus to combat recession. In March 2011, inflation numbers in the US started to climb and peaked in September in the year at 3.9%. Of course hindsight, we know that the inflation numbers did not stay but retreated since and stayed below 2% for a prolonged period of time.