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‘Transitory’ or not? St. Louis money managers weigh in on higher inflation

24 June 2021

(St, Louis Business Journal)

June 24, 2021 (Greg Edwards)

If you’ve read The Wall Street Journal lately, watched CNBC — or even been to the grocery store — you know inflation, and speculation about it, is rampant.

St. Louis Fed President Jim Bullard said inflation will likely be 3% this year before pulling back a bit to 2.5% next year. Even higher inflation is possible, he told the Clayton Chamber of Commerce on Thursday. “A new risk is that inflation may surprise still further to the upside as the reopening process continues, beyond the level necessary to simply make up for past misses to the low side,” he said.

All of this comes after years of little or no inflation, frustrating the Federal Reserve, which has had an inflation target of 2%. Speculation abounds about whether inflation is transitory, as Fed officials have said, or longer term. St. Louis money managers and others are mixed in their outlooks.

“The problem confronting businesses today, and also the economy as a whole, is that we are coming out of the Covid-driven recession as quickly as we went into it,” said Ken Crawford, large-cap portfolio manager at Argent Capital Management. “Are the pandemic-induced shortages driving higher prices merely ‘transitory’? Once inventories are replenished, once folks get back to work, once the gears of the economy are greased and running smoothly, inflation will fall.”

In contrast, Joe Terril, president of St. Louis wealth management firm Terril & Co., believes inflation will be more persistent. “I am in the inflation camp. Do not believe it is transitory or ‘because we live in a dynamic, modern economy, we can print all the money we want without consequences,'” he said.

PNC is in the transitory camp. “Inflation has picked up in the spring of 2021, but much of the acceleration will prove temporary,” the bank said in a note to investors. “In year-over-year terms, consumer price index inflation accelerated to 5% in May from 4.2% in April, the fastest pace since August 2008, when surging energy prices caused an inflationary spike. The year-over-year comparison is deceptive, however, since consumer prices fell last April and May as the economy entered free fall. Relative to February 2020, consumer prices were up 3.1% in May 2021.”

At UMB Bank, Eric Kelley, director of fixed income, said the economy welcomes some inflation, which contributes to growth, but dislikes spiking inflation, which creates instability. “In this
cycle, monetary growth has not been moderate, it has been unprecedentedly robust, perhaps temporarily creating an unstable economic situation,” he said. “We are experiencing broad inflation in the economy and excessive inflation in many industries. We think the inflation caused by monetary growth will subside eventually, being transitory.”

What should investors do?

Getting the right investment mix is key, said Ken Bower, CEO and managing partner of Clayton Financial Group.

“A challenging task in structuring portfolios today is finding the ideal balance between capital preservation assets tied to the low 1.5% yield on 10-year Treasurys and capital appreciation assets — long-term growth assets, including real estate — that can grow over time and offer dividends a multiple or two ahead of inflation,” Bower said. “For clients in their 50s and 60s, the risk of too high a percentage in capital preservation can mean a loss of purchasing power over the next few decades. For clients in their 70s and 80s, having too high a percentage in equities may mean a chance of a significant correction (10% or more) in the next year or two without enough time for a full market recovery.”