February 26, 2021

There are many different measures of inflation, but the one that the Federal Reserve considers to be most important is the personal consumption expenditures deflator, in particular the PCE deflator excluding the volatile food and energy components.

The PCE deflator rose 0.3% in January after having risen 0.4% in December after having been unchanged in both October and November..  The year-over-year increase now stands at 1.5%.

Excluding the volatile food and energy components the PCE deflator rose 0.3% in both December and January after having been unchanged in October and November.  The year-over-year increase is now 1.5%.  This is the inflation measure that the Fed would like to see rise by 2.0%.

The  purchases of Treasury securities by the Fed has caused money supply growth to surge.  We all learned back in our basic economic classes that money growth is the cause of inflation.  However, the length of time between a pickup in money growth and an increase in inflation is both long and invariable.  Thus, the recent increase in  money growth should cause the inflation rate to climb above the Fed’s 2.0% target at some point, probably next year.  For what it is worth, we expect the core PCE deflator to increase 2.1% in 2021, and 2.6% in 2022..

Given the quarantine  GDP declined by 31.4% the second quarter.  But the $1,200 tax refund checks boosted third quarter GDP growth by 33.4% with an additional 4.1% gain in Q4.  We expect  a first quarter GDP growth rate of 8.2% and 7.5% growth for 2021 as a whole as the vaccines bring the virus under control by midyear which makes us all more comfortable to go out to eat and travel, and as the $900 billion of fiscal stimulus passed late last year and the proceeds from the proposed $1.9 trillion fiscal stimulus package bolster confidence and spending in the spring and summer.  GDP growth of 7.5% this year would be the fastest annual growth rate since 1984..

Stephen Slifer


Charleston, SC