What are the inflation risks in a post-pandemic economy?
With the passing of the latest stimulus bill, attention has become focused on price increases and the effects of post-pandemic inflation in 2021. The 10-year treasury yield has been creeping up this past month and the huge deficit increase in 2020 does give pause to exactly where and when will we see the ill effects of the increase in our money supply (our government spent 33% of our annual GDP in 2020 which has only occurred 3 times over a 200-year period, during WWII in 1943-1945).
On Dec. 16, Federal Reserve Chairman Jay Powell discussed the Fed’s continued position of increasing its balance sheet through bond buying and keeping rates exactly the same. That continued position, along with the nomination by President-elect Joe Biden of the very dovish past Fed chair, Janet Yellen, to be Treasury secretary has allowed the markets to continue to move forward with stability. Unfortunately, that heavy handed Fed participation, which is many times wasteful and inequitable, this year allowed for necessary personal and national financial stability.
Living in Florida where much of the country travels to for vacation and retirement, we have experienced as much or more of the exiting city dwellers due to the realities of better social distancing in Florida and the realization that working from home allows living in our more desirable warm climate. Due to those same pressures from COVID-19, existing home sellers have held off on listing their properties, which reduced inventory. Also, new home construction has taken off. That situation coupled with lower interest rates has caused bidding wars on many properties. Price increases year over year are over 8% in Manatee County. Typically, a 1% decrease in interest rates causes an increase in home values by 10%. That rule also works in reverse when rates go higher values drop.
Inflation in autos has followed a similar path to real estate. Online purchasing was, of course, up in 2020 and has been a growing trend for years, but most buyers still favor purchasing from a dealership even if they find their dream car online. The average price of a new vehicle is close to $38K and the average price of a used vehicle is close to $23K (which is up 15% this year). Sales were down, but prices were up. One note, though, the entry level car market is disappearing. For example, Honda has discontinued the FIT. Used vehicles are taking the place of entry level new cars.
Due to unemployment being above 6% and disinflationary pressures all over the world we are not going to see long term inflation any time soon. There is commentary that we will temporarily see our traditional target inflation rate of 2% achieved in the 2nd quarter of 2021. It is expected that our GDP will finally get back to our recent GDP high from Q4 of 2019 in 2021 in Q4. I believe that due to current and past COVID restrictions and supply chain disruptions in 2020, we will continue to see material and commodity input price increases, though. That will drive prices up in certain segments. As rental property evictions and foreclosures begin to occur normally, property value gains should level off.
Danny Wood is a principal and founder of SeaCoast Financial Partners. To learn more visit MySeaCoastFinancial.com. The opinions expressed in this material do not necessarily reflect the views of LPL Financial. Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.