Buffett and Powell Talk Inflation

May 12, 2021

What does it mean when two of the most powerful voices in American financial life seem to be saying two different things?

In one corner, we have the “Oracle of Omaha,” investor Warren Buffett. As one of the nation’s richest people and most frequently sought opinions on business matters, he’s a voice that gets a great deal of attention. He says that prices are going up.

“We are seeing very substantial inflation,” Buffett told his shareholders earlier in the month. “We are raising prices. People are raising prices to us and it’s being accepted.”1

In the other corner, Federal Reserve Chair Jerome Powell sees a slightly different story. While it’s true that prices are up, for now, the economic recovery is in progress and it might be a mistake to see inflation as a guest long overstaying its welcome. Fed Chair Powell says these current price increase trends are transitory, and we should expect them as part of the economic recovery. The Fed would like to see inflation at 2% or higher - and it's had trouble staying there in the past few years. “One-time increases in prices are likely to only have transitory effects on inflation,” Powell said. He later added, “It will take some time before we see substantial further progress.”

From the Wall Street Journal: "U.S. consumer prices surged in April as the economic recovery picked up, reflecting surging demand as the pandemic eased and higher prices due to supply bottlenecks. The Labor Department reported its consumer-price index jumped 4.2% in April from a year earlier, up from 2.6% for the year ended in March. That is the highest 12-month level since the summer of 2008. Consumer prices increased a seasonally adjusted 0.8% in April from March. The index measures what consumers pay for goods and services, including clothes, groceries, restaurant meals, recreational activities and vehicles."

Policy makers are watching April’s reading to gauge the extent of what many expect to be a monthslong rise in prices, after a year of anemic overall inflation as the pandemic curbed consumer spending.  We are not really worried that inflation will spiral out of control, especially since the economy has plenty of post-pandemic ground to make up. Our view is that inflation will generally remain subdued in coming years, allowing the Fed to point to cumulative shortfalls from its two percent goal to support delaying the start of policy tightening. Incoming data support our view that underlying inflation is slowing, not accelerating. The release of CPI data for February showed that core inflation decelerated to just 0.7 percent on a three-month annualized basis from 1.0 percent in the three months ending in January.

Our two cents: The market is irrationally afraid of inflation right now and has become very disconnected from fundamentals. Earnings are doing quite well and the fundamental direction of most companies is strong, including tech stocks, which are getting battered.

From WSJ: "Economists surveyed in March by the Journal expect this year’s inflation pickup to prove temporary. They projected on average that annual inflation, measured by the CPI, will rise to 3% in June, which would be the highest rate since 2012, before falling to 2.6% by December."

How is the CPI calculated? The measure uses a "basket of goods" approach that aims to compare the costs of various consumer goods and services. These can include transportation, food, rent, haircuts and medical care (80,000 items are included in the report). Each month, data collectors from the Bureau of Labor Statistics call, visit, or check the websites of thousands of retail stores, professional offices and other establishments to assess nationwide price information. Specialists then examine the data for accuracy and make statistical adjustments based on any given item's value.

While economic recoveries always take a bit of time, it can certainly test the patience of any investor, even one like Buffet who has lived through many economic ups and downs. The good news is that a financial professional helps you create a strategy that weathers difficult economic times, including periods of inflation.

1. CNBC.com, May 3, 2021

2. CNBC.com, April 28, 2021

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