Modern Day Inflation

Macro driven metrics have without doubt established a dominion in the minds of investors worldwide, galvanized by increasingly risk-taking and euphoric sentiments, and guided by the force of inflation. Over the last 20 months, the Fed, Treasury, and Congress have seemingly opened the floodgates to a continual downpour of money used to support, subsidize, and stimulate workers, companies, state and municipal governments, the larger economy, and the financial markets. In turn, this has emerged into 1) confidence in the probability of a resilient economic recovery, 2) sky-high asset prices, and 3) fear of creeping inflation.

Figure 1: United States Inflation Rate

Source: Trading Economics

Coinciding with the ascension of inflation, the implied results that traditionally came with executing such policies above would typically create 1) elevated profit levels for corporations, 2) a stronger economy in relation to what otherwise would have taken place, 3) more money chasing fewer goods, 4) tighter labor markets (therefore higher wages), 5) heightened rates in the prices of goods (i.e., higher inflation), and eventually, 6) a tightening of monetary policy to combat inflation, ensuing in higher interest rates.

The U.S. inflation rate has long been reported on the lower end of the spectrum and this may be somewhat attributed to the controversial changes to the methods used to calculate the Consumer Price Index (CPI) in recent times. In a nutshell, the CPI estimates the percentage change in prices for a predetermined basket of goods, designed to represent the actual buying habits of U.S. consumers. It has long been the standard measure of retail inflation in the U.S., and is one of the government’s most important metrics and affects a large number of individuals (i.e., Social Security recipients, tax-deferred retirement plan participants, etc.)

Figure 2: United States Consumer Price Index (CPI)

Source: Trading Economics

Summary of Current Inflationary Landscape

To back the foundation of the economy and its participants during the first COVID-19-related shutdowns, the Fed, Treasury, and Congress went to extreme lengths to mitigate a global slowdown that could have emulated the numerous characteristics pertaining to the Great Depression. The previously listed three government institutions inserted trillions of dollars of liquidity into the economy in the form of individual payment benefits, loans and grants to businesses and governments, subjectively embellished unemployment insurance, and hyper-active purchasing capacity of bonds on a multi-institutional level. With that, many individuals were able to garner more money in 2020 than they did in 2019, largely in part to the augmented distribution of government subsidies described prior. 2020’s uptick in enhanced benefits was coupled with lower-end consumer spending, as lockdown measures restricted people to partake in vacations, go to concerts, etc. The culmination of these two factors resulted in approximately $2 trillion to consumer balance sheets.

On the other side of things, money had started to surge into the financial markets in parallel, driving dynamic price increases, and the awakening of the capital markets. The wealth effect – from stock market gains totaling in the double-digit trillions of dollars, plus soaring home prices – was substantial; the consumer balance sheet positives that sprung from higher incomes and lower spending were diminutive in comparison.

All in all, the debate on whether today’s inflation is permanent or transitory shall continue to persist. Arguers of permanent inflation will use the rise in used car prices, shortages in labor, increases in material and component prices, among others to boast their argument on the matter. While transitory believers will counter saying that there is an unrealistic expectation that all parts of the global economy will immediately resume efficient functioning among the global shortage of supplies. Although there are brilliant people on both sides of the argument, we believe only time will tell whether the optimists or pessimists will prevail, and if their respective money is where their mouth is – then much gold awaits the victor at the end of the rainbow for when the COVID storm passes, and the dust settles.       

Written by Jimmy Vo of Sampford Advisors.

About Sampford Advisors

Sampford Advisors is a boutique investment bank exclusively focused on mid-market mergers and acquisitions (M&A) for technology, media and telecom (TMT) companies. We have offices in Toronto, ON, Ottawa, ON, and Austin, TX and have done more Canadian mid-market tech M&A transactions than any other adviser.