Is It Inflation Or Fear of Inflation?

Is It Inflation Or Fear of Inflation?

Is it inflation or fear of inflationIs it inflation or fear of inflation

You may read or hear the term “inflation fears” being used with increasing frequency. In turn, that raises the question of what we’re dealing with — is it inflation or fear of inflation?

What Is Inflation

Let’s start by defining terms. We will assume you know what fear is. On the other hand, you may not be sure about inflation.

Inflation is the increase in prices throughout the entire economy. Consequently, a rise in gas prices alone is not inflation. However, if food, housing, general goods, and gas prices jump together, you are dealing with inflation.

The primary measures of U. S. inflation are the Consumer Price Index (CPI), Producer Price Index (PPI), and personal consumption expenditure price index (PCE).

In April, the CPI jumped to 4.2 percent, its biggest 12-month increase since September 2008’s 4.9 percent hike. 

Markets React

With one of the primary inflation indicators jumping, many wall streeters started selling. (Cue Chicken Little!). However, the Federal Reserve did not take the bait and stilled inflation fears by reasserting its stand against raising rates. The Fed has said repeatedly it expects “transitory inflation” as the economy reopens. 

Fed Chair Jerome Powell has stated he does not see a need to tighten monetary policy until inflation runs above two percent for an extended period.

The central bank’s consistency calmed fears and stocks bounced back.

“Inflation is a process and not a one-time event,” said Chris Low, chief economist at FHN Financial told Reuters. “These bottlenecks are one-offs. The Fed will not consider action until it views price levels changes as permanent rather than temporary, something it does not consider possible until the economy is at full employment.”

Was April a False Inflation Positive?

There is an argument to be made that April’s CPI was a reflection of the anormal not the new normal.

Many areas seeing inflation in April’s CPI were the result of an economy recovering from the pandemic. About half of price increases came from four segments. They were: used cars, car rental, airfare, and dining out.

With more vaccinations and COVID-19 restrictions relaxing, Americans accelerated travel and leisure activities. As a result, there was a sudden burst of demand hitting a limited supply. The April CPI reflects the difference between a pandemic lockdown economy and a rapidly rebuilding economy. 

Used Car Prices Lead the Way

“The index for used cars and trucks rose 10.0 percent in April,” according to the U. S. Labor Department. “This was the largest 1-month increase since the series began in 1953, and it accounted for over a third of the seasonally adjusted all items increase.”


Like many industries, the rise in used car prices is the result of shortages.

The shortage of semiconductor chips has lead to an increase in electronics and automobile prices. With new cars in short supply, the demand for used cars has increased. 

At the same time, shortages brought on by the pandemic have moved other prices higher. Car rental companies that drastically cut their inventories during the pandemic are now swamped with customers.

Travel bans and lockdowns lead to airlines cutting back and reducing staff. Meanwhile, restaurants went through the same process. Ramping up again takes time.

The elevated price of lumber has contributed to the rising cost of home purchase and home repair prices.

Is It Inflation or Fear of Inflation?

Shortages are often overcome with increased output. However, it takes time for services and products to catch up. As a result, some sectors, such as leisure, the automobile industry, and travel will recover in time. The question is, how much time?

The Fed’s criteria of two percent inflation over an extended period gives businesses time to recruit workers and ramp up manufacturing. However, it takes more time to grow a tree.

What To Do?

If Chair Powell is right and all the economy needs is a little time for supply to catch up with demand, all we need is patience. 

However, some expenses are high regardless of inflation. The cost of education drives most college students into debt and medical expenses are the leading cause of bankruptcy in this country. Nonetheless, those costs may be considered systematic failures rather than inflation factors.

Safe Havens

If you are concerned that inflation is coming sooner rather than later, you might want to make a few moves to balance your assets.

  • If you have an adjustable-rate mortgage, you might consider locking in a low rate with a fixed-rate mortgage.
  • Floating rate bonds. As the name implies, the interest rate on these bonds fluctuate based on inflation. To get maximum diversity, you can invest in a portfolio of these bonds through mutual funds and ETFs.
  • Gold. Owning gold has been a favorite tactic of inflation bears for a long time. They like the fact that it holds its value. Again the best way to own gold may be through an ETF or mutual fund. 


Some investments can get you stuck with low returns if inflation does not materialize.

  • Long-term bonds. Many investors favor these bonds for safety. They do protect principal but lose ground when interest rates take off.
  • Long-term CDs. Again, this is a popular investment for those seeking safety. Like long-term bonds, CDs protect your principal. However, if inflation accelerates, your CD will be left at the starting gate.


George Bernard Shaw said, “If all the economists were laid end to end, they’d never reach a conclusion.” And people thought he was trying to be funny.

A lot of analysts are talking about inflation. As a result, a lot of average investors are becoming concerned. However, the Fed, which is tasked with reining inflation, is advising patience.

If you’re confused about what to do, that’s understandable. For most of us, the right move is to keep our investments balanced and flexible. That means not getting locked into long-term fixed rates – unless your talking about your mortgage. It also means spreading investment risk through diversity. For most of us, that means finding a few mutual funds or ETFs that align with our financial goals and investing in them monthly.

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