Each month members of Gordian Group team pick articles, posts or current news events that we found interesting and worth sharing with Gordian clients and our growing network . We provide some commentary and context and where applicable how Gordian Group can help. This month, we discuss inflationary trends in the US and the impact the Federal Reserve’s necessary response will have on U.S. markets.
Inflationary Trends Continue
Related to our ongoing series on the cost of capital, we wanted to highlight notes from a recent webcast with James Grant, founder and editor of the Interest Rate Observer. Grant makes several salient points regarding inflationary trends in the US and the impact the Federal Reserve’s necessary response will have on U.S. markets. The Fed has spent the past decade “promot(ing) smooth market functioning” and this dovish policy (and the belief the Fed will always be there to support the market) have pushed capital costs down and risk-taking up. However, the Fed will be forced to raise interest rates if inflationary trends continue. The fallout on asset prices could be stunning to some. Read the full piece here: Jim Grant: The Fed Cannot Control Inflation – Articles – Advisor Perspectives
What Are Some Examples of Inflation in 2021?
We agree with Grant’s take on inflation. Higher commodity costs (copper, lumber, sugar, wheat, oil) are translating their way into higher consumer costs. Proctor & Gamble, Hershey, Coke, and Kimberly Clark (among many others) have announced price hikes in recent months. The largest home rental company in the United States just introduced 10%+ rental rate increases for 2021. And a recent BofA study reported that there was an 800% increase in references to inflation on earnings conference calls. Fedspeak of “transitory” increases that will settle out in future years is wishful thinking in our mind. Prices increases tend to be very “sticky” and the Fed will eventually take steps to respond.
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All of this points to the likelihood of increases in interest rates, thereby driving up the cost of capital. As we have noted in our prior blog series, this will have meaningful implications on capital markets. The Biden administration’s plans for $6 trillion in additional spending will likely only add fuel to the inflationary fire.
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Commentary by Gordian Group CEO Henry Owsley and Managing Director Liam Ahearn