Fear can be defined as False Evidence Appearing Real. Inflation is front and center again after two months of reduced interest. A Google Trends query shows that “inflation” is trending again after peaking during the week of May 9-151. The media can be a double-edged sword. They offer needed information but deliver it in a jaded fashion as eyeballs translate into revenue. Much of the commentary escapes analytic scrutiny. Here are the main faux pas the media seems to be falling victim to.
Warren Buffet famously said, “investing is simple but it’s not easy.” Many try to short cut analytical thought with an overreliance on quantitative modeling. Numbers are an analyst’s syntax, but improper use of the syntax can lead one astray. Lazy analysts, or even media up against a deadline, tend to extrapolate the recent past into the long future. This assumes the “new” trend is the only trend, yet trends change all the time, and even long-term trends can have near-term fluctuation. Just because recent inflation numbers are high doesn’t mean higher inflation will trend indefinitely.
2) Biased Data Mining
Another culprit of lazy analysis is biased data mining. Data mining is extracting patterns from large data sets. Analysts should be conscience of reviewing data objectively to guide one’s decisions and not simply seeking the data that confirms one’s preconceived conclusion. Yes, the Federal Government has printed tons of money, but the Federal Government has printed copious amount of money in the ‘80s, ‘90s, ’00 and ‘10s, but inflation has fallen over the decades. To be clear, excess money can be a contributor to inflation, but inflation pressures are more far reaching than the amount of available money.
3) Ignoring Fundamentals
The first two are often accompanied by the third… ignoring fundamentals. Good analysts seek the root cause. What caused inflation to pick on over the past few months and is it permanent? The cause of inflation is based on three matters; 1) price change from a year ago, 2) supply chain disruption and 3) pent up demand. Starting in April 2020, prices were depressed due to the unnatural economic shut down. Only time can overcome this part. COVID caused factories and service businesses to close. Reopening is much harder. It takes time to reopen, rehire and retrain. To further strain the supply/demand mismatch, mass inoculation gave people the confidence to almost immediately resume normal lifestyles.
Which areas are driving near-term inflation? The answer is travel, energy, hospitality and food/dining. In other words, experience industries shunned in 2020. Will people vacation indefinitely at the pace seen over the past few months? It’s safe to say no. People are simply catching up on pent up vacation demand, which they were deprived of last year. Recent consumer confidence surveys have noted lowered demand for big ticket items in anticipation of lower prices. Hence, consumers believe inflation is temporary.
Could inflation turn into a more enduring situation? Sure, but the current data and analysis would suggest long-term runaway inflation, purported by the media, is not likely. Have a great weekend and I hope you’re enjoying your summer!