William Blair’s Olga Bitel, global strategist with investment management, and Richard de Chazal, London-based macroeconomist, joined clients virtually for an insightful conversation on how inflation and economic policy could impact growth and investments in the coming year.
Top of mind remains inflation—the pace of price change—with year-over-year rates much higher in 2021 than economists and industry analysts had expected. The coronavirus pandemic has and continues to impact the outlook. The arrival of the Omicron variant is another reminder of uncertainty.
“But a lot of the things that have plagued our inflation outlook in 2021 will hopefully be resolved over the course of 2022,” said Bitel during the firm’s fourth A Healthy Way Forward event for the year held December 3.
While growth is strong, inflation will remain quite elevated, at least, for the time being, she added. So those companies with strong fundamentals and earnings growth “will be prized above others and a natural place to look for opportunities.”
The U.S. Consumer Price Index (CPI), a key gauge of inflation, had been running high at 5% plus since June. In October, the CPI rose to 6.2%, the largest year-over-year increase since November 1990. While year-over-year numbers have been rising, monthly inflation had been falling until October—from 0.8% in April to 0.4% in September. Note: Since the talk, CPI year-over-year numbers reached 6.8% and 7% for November and December, respectively, while monthly inflation was 0.8% and 0.5% in those months, down from 0.9% in October.
Through October, half of the yearly increase has reflected rising prices for motor fuel/gasoline and autos, Bitel said. The auto industry continues to struggle with a short supply of vehicles amid car makers decisions at the onset of the pandemic to cut semiconductor orders, anticipating demand to decline. Fuel prices, on the other hand, have climbed as oil is the closest fossil fuel substitute for natural gas, which has become a victim of political wrangling.
“The narrow concentration of inflationary pressures usually suggests that they are transitory—a good place to look for explanations of how things pan out from here,” Bitel said.
Since the world economies began reopening in the spring, the gap between the supply and demand for goods has been unusually wide, especially in the United States, she added. That gap essentially reflects why inflation is rising. Two major culprits behind the widening gap remain a shortage of semiconductors—an essential component needed to produce cars—and major disruptions due to COVID restrictions at shipping ports in China, home to the world’s largest ports.
“Monetary policy is not a remedy for either of these,” Bitel said. “In fact, our economy appears to be working as intended. Supply chains are adjusting, consumers are responding as we would expect them to. There are not any signs yet of hoarding or bringing forward purchases in anticipation of further price increases. Goods that have suffered the largest price increases, vehicles for example, have seen a significant drop in demand.”
Weight Off Central Bankers
De Chazal, who focused his comments on U.S. economic policy, said many of the issues facing the United States today are related to lower participation in the work force compared to other western economies while investment in capital stocks (i.e., buildings, infrastructure, equipment) and productivity growth has been trending lower.
The answer for the last few decades to solve economic problems has been to rely on central bankers, which has pushed monetary policy further and further to the extremes, de Chazal said. But given interest rates at historical lows, greater financial instability, greater income inequality, and pressing world crises like climate change, “there’s both room and a need for fiscal policy makers to play a greater role in the direction of economic policy going forward.”
“COVID was a really big wake-up call that the government can actually have the power and has the fiscal space to change things if it really wants to,” de Chazal said.
There have been three major pieces of legislation introduced in Congress in 2021: the $1.9 trillion COVID-relief plan (passed in March), the recent $1.2 trillion infrastructure bill (passed in November), and the trillion-dollar-plus reconciliation bill passed by the House and now with the Senate. The infrastructure bill is geared toward capital stock investments while the reconciliation is focused on the labor force, with the goal of increasing the capacity of the economy as a whole.
“A transition or more burden sharing between monetary and fiscal policy is necessary to help generate a faster more sustainable rate of productive and noninflationary economic growth going forward,” said de Chazal.