Economic Forecasts

The Inflation Spike Probably Won't Last

Long-term demographic and economic trends will keep a lid on future price hikes.

Jim Paulsen is chief in­vestment strategist at the Leuthold Group, an investment research and money management firm.

Prices on everything from lumber to eggs have been rising. What’s behind this recent surge in inflation? We took the economy from a depressionary bust to a wartime boom in less than a year, and when you do that, companies just can’t keep up. There really isn’t any precedent in the postwar era in which you combine an economic crisis with a health crisis. Companies cut everything to the bone to stay open. That would have been fine if you had a normal recession, but this one ended about as soon as it started. This is why we don’t have enough shipping containers, we don’t have enough homes, we don’t have enough semiconductor chips.

Do you think the Fed is pushing up prices? With massive monetary and fiscal stimulus, economic policymakers have done everything they possibly can to produce inflation. Moreover, the Federal Reserve has adopted a lot of the political agenda of the Treasury Department. Their new joint philosophy is to “go big” with support for the economy. They believe disinflationary forces in the world remain so strong that economic growth can be boosted with policy accommodation without causing significant inflation.

Do you agree? What will prevent long-term, 1970s-era inflation? There is so much more competition we didn’t have in the 1970s that will continue to act as a disinflationary force. There’s a strong relationship between the growth of the labor force and inflation trends. In the 1970s, the labor force grew 2.5% a year. That’s a lot of new people getting money they can spend. By contrast, in the five years ending in 2019, the U.S. labor force grew just barely over 1%. Not only do we have far slower labor force growth today, we’ve also got a much older demographic. Older populations tend to grow more slowly and generate less inflationary pressure. Demographic trends are even worse in Japan and Europe than in the U.S., and what gets less attention is that the poster child for the emerging world, China, probably has the worst demographics of all because of its former one-child policy. Plus, U.S. global openness is so much more pronounced than it was in the ’70s. Then, we were essentially a closed economy with a small proportion of international business. Now, we’re the opposite of that. Our largest companies do more business abroad than they do here.

You’ve also cited technology as an “inflation slayer.” Why is that? In recent years, the technology sector has enjoyed its third-most-dominant period of stock market leadership of the postwar era. If you look at the performance of technology going back to 1950, whenever you had major technology runs, over the next three years you had a major pickup in productivity. I think we’re in the midst of that now. Technology connotes disruption, new products, more capital being added to the labor force—all things which enhance productivity. When workers get to use new methodologies, they can produce more per hour, causing the cost of labor and inflationary pressures to lessen.

With that in mind, how long will this period of inflation last? I think in the short term we’ve created a big mismatch between supply and demand, which is leading to higher prices. This could continue through the rest of this year and perhaps the early part of next year. However, the odds are that by this time next year, production will catch up with demand.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
The 25 Cheapest U.S. Cities to Live In
places to live

The 25 Cheapest U.S. Cities to Live In

Take a look at our list of American cities with the lowest costs of living. Is one of the cheapest cities in the U.S. right for you?
October 13, 2021
15 U.S. Cities With the Highest Average Home Prices
real estate

15 U.S. Cities With the Highest Average Home Prices

Home prices have rocketed higher across most of the country, but housing costs are acutely painful in these 15 U.S. cities.
October 20, 2021

Recommended

Kiplinger's Economic Outlooks
Economic Forecasts

Kiplinger's Economic Outlooks

Regularly updated insights on the economy’s next moves.
October 26, 2021
Is Stagflation a Serious Market Risk?
investing

Is Stagflation a Serious Market Risk?

High inflation and corporate warnings of supply chain issues have brought stagflation fretting to a fever pitch.
October 12, 2021
Business Cost Outlooks for 2022: Eight Key Sectors
Economic Forecasts

Business Cost Outlooks for 2022: Eight Key Sectors

What’s in store for all sorts of business costs in 2022?
October 12, 2021
Poll: ESG Investing Is Gaining Traction
Becoming an Investor

Poll: ESG Investing Is Gaining Traction

Investors care a lot about environmental, social and governance issues according to our new poll.
October 12, 2021