The U.S. economy continued to recover during the third quarter despite a surge in COVID-19 due to the Delta variant. Second quarter GDP (as reported in the 3rd quarter) came in at 6.7%, but the Atlanta Federal Reserve's "GDPNOW" model is pointing towards significantly lower growth for the 3rd quarter. What is not slowing is inflation. Persistently high inflation and slowing growth means a whole generation of investors might have to start googling the word "stagflation". The Federal Reserve (the "Fed") and other central banks continue their fervent defense of interest rate inaction because "inflation is transitory". A wealth of data seems to indicate otherwise, which leads one to ask why the Fed governors want to die on that hill. The Fed's balance sheet is now over $8.4 Trillion, and governmental deficits continue to remain historically massive. President Biden's two hallmark spending initiatives totaling roughly $1 Trillion and $3.5 Trillion respectively, are mired in both intra-party disagreements and inter-party rancor.
Year-over-year Consumer Price Index (CPI) came in at a 5.3% for August (as reported in September) which marked the 4th consecutive month at 5% or higher. This has not happened since early 1991. Shortages in everything from semiconductors to truck drivers continue to roll through the global economy. Energy prices skyrocketed in the 3rd quarter as did shipping costs, home prices, and food prices. The squeeze in natural gas prices and petroleum products evoked shades of the energy crisis in the 1970s. One might look at the year-over-year change in lumber prices (-1%) and see that as evidence that the Fed might have a case with their transitory inflation argument; though lumber prices have come off their highs, they are still nearly 50% higher than in December of 2019 (pre COVID-19 crash). More and more, we believe the only way inflation might be viewed as transitory is if one considers the Fed's intervention to stabilize the financial markets since 2008 as transitory.
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