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most of us have never dealt with inflation in our professional lifetimes, either on household or business side. sure there have been exogenous events -- tusnami, for example, and periodic supply challenges, but since 1980s those have been transitory
it is understandable after a 40-year period dominated by disinflation that people are now increasingly concerned. looking at market-based inflation expectations the movement is real, but still muted. even on the household side UMich and other expectations measures are creeping up
this is the first of several inflation scares we will see this year, especially as we get to the spring and bump against base effects. that said, we still have some work to do to get to the kind of inflationary environment boomers remember from the 1970s
i am older so remember behavioral shifts in 1970s (grocery shopping once a month, clothing purchases front loaded to get ahead of price changes, etc). my father was independent pharmacy operator dealing with margin compression & increasing competition from new chain stores
following the Great Recession, the shift back toward "the real economy" (not coincidentally the name of the publication JB and I created afterward) entails a shift in focus from wall street to washington dc. which looks much more like the 60s and 70s pre-Reagen
to be clear, we *have* had inflation the past 40 years, it's just been isolated to financial assets (with periodic busts along the way). with fiscal policy tired from the heavy handed 70s, demand shortfalls in the economy were handed over to the Fed to solve, and they did so.
now, the pendulum swings back the other way and there are some important changes happening that those younger than me havent experienced. chief among them is the shift for treating demand shortfalls at the fiscal policy level
as boomers age out of policy making roles, and millenials and gen z age into those roles, this shift may potentially be more dramatic than many expect. (note: i leave out gen x as we are not really a group but a small group of disaffected tail end boomers)
meanwhile, with household balance sheets for top 2 quintiles of income earners (which account for ~60% of spending on things people want (vs need)) the cleanest since early 80s, before credit boom even began, we should expect some enduring demand issues
and simultaneously there is also some pricing power building. longer term, i am not sure how much the release of ~$4trillion in impaired economic activity as the US economy reopens will change behavioral dyanamics for households and firms that are rooted in the prior disinflaiton
if it changes meaningfully, then we will be at a point where 1) monetary policy is historically accommodative 2) fiscal policy is supportive of increasing demand and reducing K gap 3) demand-pull exists 4) cost-push exists
and we have not yet even addressed the >$3trillion (our 2015 estimate) infrastructure deficit
and we have not yet even addressed the acceleration from labor-enabling technology (everyone wins!) to labor-replacing technology (every *future* generation wins! but not you)
i guess, to sum up, all of these ingredients, at least to me, indicate some significant changes looming in the valuation of financial assets
