There’s a topic that has been dominating the airwaves post-pandemic. And that’s inflation. Turn on, tune in, and you will likely hear pontification on the subject. Most of us in the U.S. are feeling the impact of inflation in our lives as well. Whether it’s the groceries we buy, energy bills we pay, used cars we get, or travel we (finally!) get to do, prices seem higher than they have been in a very long time. Domestically, the latest official measurements of inflation put the CPI-U (Consumer Price Index for All Urban Consumers)[1] at about 5% for the past 12 months, which is a print far beyond the inflation levels of the pre-COVID environment, as well as beyond the Fed target of 2%[2]. More importantly, this 5% level is higher than yields on almost all bonds, implying something’s got to give.

How Did We Get Here?

Before delving into the current state of U.S. inflation, it’s worthwhile looking at what we did to get to where we are now. I believe that the current era for the capital markets’ environment began after the 2008 financial crisis—an event that marked a hard reset for the global economy. The era between 2009-2019 was one of the slowest economic recoveries on record, despite constant global central government stimulus, near-full employment, and ever-increasing debt levels. I call this era “Slow and Low”—slow growth, low inflation, and low interest rates.

While the decade following 2008 was a low inflation era, the big question is why? How in the world didn’t the continued, staggering levels of stimulus, government debt and persistent monetary policy, move the needle towards growth or inflation? In fact, interest rates in some countries drifted into negative territory![3] Well, the answer, by most measures and to the contrary of popular opinion at the time, the post-2008 environment has been dominated by a few powerful deflationary forces.

Deflationary Forces

• Changing Demographics – All across the first world, populations are aging, and family formations are falling. Older people tend to save more – worried they’ll outlive their retirement savings – while younger people tend to be minimalists. Many rent apartments in cities vs. buying homes or take public transportation vs. buying cars. These demographic trends imply slow growth in consumption which is deflationary.
• High Debt Levels – Most First-world countries, businesses, and consumers carry more debt today than ever before[4]. Once high debt levels are reached, new debt has diminishing returns, and old debt needs to be paid off. This often results in less spending and an oversupply of goods.
• Shareholder Primacy – For decades, average wages have not kept up with earnings growth nor inflation. This has been great for business ownership, but disadvantageous for the average worker’s wallet.
• Technology – If the 1990’s and 2000’s represented the buildout of the technology infrastructure, then the 2010’s and 2020’s represent the use of technology to create scale. Some technology is inherently destructive for prices.
• Globalization – Globalization has likely never been a stronger force of deflation than it is now: competitors, supply chains, and movement of capital have become more and more interlinked.

But the question is: Are these deflationary forces persistent or transient?

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[1] U.S. Bureau of Labor Statistics

[2] Federal Reserve Bank of St. Louis

[3] Bloomberg

[4] Federal Reserve Board