Written by Peter Baden, CFA, Chief Investment Officer
Headlines of the Week
Google “Define: Transitory” you get a quick definition: “not permanent”. Fed Chairman Powell stated this is what they meant by “Transitory”. However, scroll down a bit and Merriam-Webster definition is: “of brief duration”. Perhaps it’s understandable that there was some confusion. Perhaps the economists at The Fed were surprised by the level and persistence of inflation in 2021. But we now know, stoking economic demand with low rates and fiscal stimulus checks, while at the same time limiting supply with pandemic related restrictions (shutdowns, travel bans, etc.) is a great way to finally break our cycle of low inflation. The question now? Is this inflation the new normal?
First, just by simple math, be prepared for several more months of headlines of high year over year inflation. The most recent headline CPI index level was 278.88. If we stop inflation for December and get the exact same 278.88, it’s still a 6.6% year over year increase from the December 2020 index of 261.56. If CPI stays 278.88, it would be before May we see a headline YOY inflation figure below 4%.
Second, until we see auto production improve (See Below), you can’t expect used car prices to drop. Used cars become junk cars and demand for cars is high (Reopening, Stimulus, Pandemic Related Demand) meaning prices go up as cars become scarce.
But new car production will go up and so will so many other commodity and finished goods items, and when they do, the long-term forces of technology, innovation and improved price discovery should take hold and mitigate future inflation rates.
US Domestic Auto Production
Indexes used for AAA Municipal Yields
2 Year: BVAL Municipal AAA Yield Curve (Callable) 2 Year (Symbol: CAAA02YR BVLI)
5 Year: BVAL Municipal AAA Yield Curve (Callable) 5 Year (Symbol: CAAA04YR BVLI)
10 Year: BVAL Municipal AAA Yield Curve (Callable) 10 Year (Symbol: CAAA10YR BVLI)
30 Year: BVAL Municipal AAA Yield Curve (Callable) 30 Year (Symbol: CAAA30YR BVLI)
Indexes used for US Treasury Yields
2 Year: US Generic Govt 2 Year Yield (Symbol: USGG2YR)
5 Year: US Generic Govt 5 Year Yield (Symbol: USGG5YR)
10 Year: US Generic Govt 10 Year Yield (Symbol: USGG10YR)
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