Producer price as of May rose 6.6% over the last 12 months –one of the fastest increases ever. Many parts of the economy have risen even faster. Used car and truck prices are up 30%! Recently on television a woman was explaining that an auto rental for her vacation was going to be almost $2,000 up from her expected cost of $550. Uber’s rates are up 40% during peaks.
Home prices are rising fast with many houses selling for more than the list price. Lumber prices have almost tripled. Kyle Little of Sherwood Lumber said, “Prices will probably fall some by the end of the year, but don’t expect them to be near as low as they have the previous 10 years.” The Kroger CEO said something similar, that grocery prices should go down some later in the year, but not to pre-pandemic levels. We are going to have to live with higher prices.
Federal Reserve Chairman Jerome Powell has said they are willing to accept higher than normal inflation because they want to get unemployment lower. There are officially 10 million potential workers considered unemployed, even though the number of open positions available hit a record of 9.3 million in April. Everywhere you look, there are help wanted signs. At least one local manufacturing company is calling retired workers and asking them if they want to come back to work. They just cannot find enough people willing to do the job, even with increased wages. It is not surprising when people can make more being unemployed than reporting to work. Almost half of the states have taken steps to suspend these policies. So far, our state is not one of them. Increasing wages, while good for the workers, does increase inflation.
Inflation is inevitable. You cannot have massive fiscal stimulus from Congress and easy monetary policies from the Fed and not have inflation. To slow down inflation when it explodes, the Fed must increase interest rates. This will most likely be the event that starts a downward trend in the stock market. That is the reason many large financial firms want rates low. They make more money when the market is high. Rising rates, which are inevitable, will cost companies, individuals and the government more in interest expenses. Some large financial institutions are starting to prepare for this upcoming inflation.
Deutsche Bank, one of the world’s largest, warns that a global “time bomb,” due to rising inflation, could be coming. They fear we could get back to 1970s-era inflation. It was so bad than, CD rates were over 15%. While not every economist agrees, JP Morgan is stockpiling cash to prepare for “a very good chance” inflation is here to stay. Their balance sheet has $500 billion in cash to take advantage of higher interest rates.
Low interest rates over the last 20 years has been one of the biggest drivers of the stock market. Over the last 10 years, the Dow has been up more than 250%! Is this really reasonable? The deficit is exploding and taxes must go up. Jamie Dimon, CEO of JP Morgan, recently pointed out that many fintech and big-tech companies have larger market capitalization than nearly all US banks. Do you think there are a lot of crazy market valuations when many of these companies are valued higher than a bank with $500 billion in cash?
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.” If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.