It is no secret that the federal government has been spending a lot of money during the past twelve months to combat a historic pandemic and the ensuing economic troubles from lost jobs and reduced consumer spending particularly in the service sector. All this support and years of low rates and supportive financial conditions—and the support of the Federal Reserve to not raise rates too quickly – has a lot of investors concerned about the potential for run away inflation in the years to come.
This wouldn’t be the first time that inflation concerns have come front and center – many expected higher inflation post Global Financial Crisis years that has yet to materialize. There are inflation “truthers” who argue about the “real” inflation rate. There are certainly issues with how it is calculated, the basket of goods, and the hedonic adjustments, but for the most part we can all agree there hasn’t been much inflation in the last few decades.
Why hasn’t there been inflation? For one thing there have been some large deflationary trends in place like new technology applications and globalization which combine to increase the supply side of the economy, thus keeping inflation low. On the demand side, lower population growth, an aging population, and increasing wealth inequality can all be pointed to as keeping a lid on potential inflation. While there may be some short term pent up demand after the pandemic ends which could lead to higher inflation, this is likely to have more of a transitory effect, not be the beginning of a new trend.
At Maple Capital we believe inflation could increase for a time, though we do not expect a material change in the long term trends for the reasons mentioned above. However, inflation can be hard to forecast so it is understandable that there are a lot of differing opinions on the matter. We will continue to take a long term view in our security selection process, investing in businesses we believe will benefit from long term trends and outperform over a full business cycle.