Inflation Transient or Not May Be a Good Thing | ETF Trends

By Kimberly Woody, Senior Portfolio Manager

“Inflation is taxation without legislation.” ~ Milton Friedman

We have long been concerned that the U.S. Federal Reserve (the Fed) had backed themselves into an impossible corner. With record corporate and government debt and seemingly endless monetary accommodation, it seemed unlikely the world economies could be weaned off support absent major market disruption. COVID-19 theoretically exacerbated an already worrisome situation and a struggling economy. We know debt suppresses GDP and so the Fed is caught in a Catch-22. How do you reflate an economy laden with debt with more debt? The Fed has spent a decade pushing on a string generating little economic growth. But reversing a low interest policy has proved problematic – one only has to look to Japan. Oddly what COVID has left in its wake may be just what the Fed needed to reverse course and reload their toolbox.

The Fed has been unsuccessful in reaching their inflation goal of a sustained 2% (as measured by the Personal Consumption Expenditures Price Index or PCE from the Bureau of Economic Analysis) – until COVID. And now we’ve got more inflation than we’ve seen since the early 1980’s. The root cause of persistent systemic inflation are wages. With strong wage increases only among lower income workers, the durability of inflation may be somewhere in between permanent and transient. Inflation is a regressive tax and higher wages may offset reduced purchasing power among this population which in turn keeps a consumer-driven economy clipping along at a decent pace. The net of all this is an environment with elevated and potentially semi-persistent inflation combined with lower rates. The value of assets is preserved, the economy is spared the crushing blow of an impaired consumer and our record levels of debt begin to fade.

As the reserve currency, the U.S. could very well use inflation to pay off its debt. But we are all well acquainted with the evils of inflation. In fact, inflation has been the Fed’s boogeyman for 30 years. As with assets, inflation also devalues debt. The Fed just may have found a way out of its Catch-22.

Source: Bureau of Economic Analysis

GLOBALT is an SEC Registered Investment Adviser since 1991 and, effective July 10, 2013, remains a Registered Investment Adviser through a separately identifiable division of Synovus Trust N.A., a nationally chartered trust company. This information has been prepared for educational purposes only, as general information and should not be considered a solicitation for the purchase or sale of any security. This does not constitute legal or professional advice, and is not tailored to the investment needs of any specific investor. Registration of an investment adviser does not imply any certain level of skill or training. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information may be required to make informed investment decisions, based on your individual investment objectives and suitability specifications. Investors should seek tailored advice and should understand that statements regarding future prospects of the financial market may not be realized, as past performance does not guarantee and/or is not indicative of future results. Content may not be reproduced, distributed, or transmitted in whole or in part by any means without written permission from GLOBALT. Regarding permission, as well as to receive a copy of GLOBALT’s Form ADV Part 2 and Part 3, contact GLOBALT’s Chief Compliance Officer, 3400 Overton Park Drive, Suite 200, Atlanta GA 30339.  You can obtain more information about GLOBALT Investments and its advisers via the Internet at, sponsored by the U.S. Securities and Exchange Commission.

The opinions and some comments contained herein reflect the judgment of the author, as of the date noted.

Investment products and services provided are offered through Synovus Securities, Inc. (SSI), a registered Broker-Dealer, member FINRA/SIPC and SEC Registered Investment Adviser, Synovus Trust Company, N.A. (STC), Creative Financial Group, a division of SSI. Trust services for Synovus are provided by STC.

Regarding the products and services provided by GLOBALT: