Inflation has been largely dormant since the Carter Administration. Generations of investors have come and gone and never experienced a bout of it. What once was the bane of savers has been largely eliminated in the Western world. Perhaps until now.
Since the Great Financial Crisis, central bankers have been battling the opposite—deflation. The prospect of deflation, a quasi-apocalyptic vortex of falling prices that destroys demand, went from fringe theoretical issue (outside of Japan) to reality.
But COVID-19 may have changed all that.
Not since the oil shock of the 1970s have we seen supply chains so disrupted. Perhaps inflation required an exogenous shock to be revived. However, pockets of shortages of protein and other items are beginning to appear. Because of these sudden supply shortages, the stage is set for skyrocketing prices on a few key items and inputs. Grocery prices are already surging.
This could carry over as the economy begins to reopen. Restaurants, soon to be operating under social distancing constraints with fewer tables, servers, less food in the kitchen, seem almost certain to raise prices. The same phenomenon seems likely to emerge in many other industries where supply chains have been disrupted by the virus.
Will these effects be long-term? Perhaps not, as the global supply rebounds. However, with so much uncertainty about a potential resurgence of the coronavirus as we attempt to reopen, would anyone be surprised if global suppliers are reluctant to place large orders and bring employees back on the job? Seems quite likely that higher prices are here to stay for awhile.
Of course, this has serious ramifications for asset prices. Fixed income investors could be faced with truly negative real returns, and equity investors would be pay less for diminished earnings power.
As the world begins to wake up to these changes, it will be worthwhile to be paying attention.
Any opinions are those of Burke Koonce and not necessarily those of Raymond James. This information is not intended as a solicitation to buy or sell any security referred to herein. Burke Koonce is a financial advisor at Raymond James & Associates, Inc., member New York Stock Exchange, member SIPC. www.raymondjames.com/burkekoonce