Good Morning!
Markets are consolidating their gains after the biggest rally since March. The S&P 500 closed above 4160, which was the point that it broke down last week. There could be additional downside this week but the more likely scenario is that there will be more upside this week. After this week, there could be a more meaningful move down but we shall see.
As for the inflation front, the bond market took the PPI increase in stride and actually moved down on the news. Here are the reasons why I think we will be fighting disinflation rather than inflation.
1. The channelenges in the economy are now supply disruptions. Supply disruptions can be difficult to correct but they do eventually correct. While it may take a year two for some firms to correct, most will find alternative methods to solve the bottlenecks and get their businesses back to normal. Enginuity will allow businesses to thrive as its been the case forever.
2. As I mentioned previously inflation in commodities come and go. The one that we are most familiar with is Gas and Oil. How often have we seen the price of gas go way up and way down over the years? It is like that for all commodities. Even in the case where prices are maintained for long periods, it does not have create sustainable inflation in the economy.
3. So real inflation is inflation that is sustained for very long periods of time. There is only one and that is wages. The reason is because once you pay someone a certain wage, it is seldom reduced and often raised. Firms do not reduce pay but only reduce the workforce when they need to cut. When was the last time you had a pay cut?
4. Covid has only accelerated workforce conditions that were going to happen anyway. I have been working from home since the early 90’s when I worked for IBM. IBM got it right early on and were able to reduce their costs mostly by selling most of their real estate holdings. So now working from home is the norm for higher paid workers. That is not inflationary but just the opposite.
5. The workforce today is global. Covid has created more small businesses than ever before. If you are a small business owner like me, your go to place for workers is Upwork. It takes me less than a day to find highly talented, low cost workers in countries outside of the US. I am paying one third of the cost that I would for a US employee. Multiply that by millions of workers that are teaching themselves to speak English and are highly educated. Again, another highly disinflationary process that is not going away.
6. Mergers and Acquisitions is another cause of disinflationary pressure. Every acquisition results in workforce reduction, which places additional pressure on wages.
Keep watching the bond market. That market keep telling us that inflation is not the problem.
