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What can prior economic recoveries reveal about near-term inflation risk?

Every cycle is different, but inflation tends to remain low for several years after economic recoveries begin.


 Inflation builds slowly as economy recovers


The economic shock of the COVID-19 pandemic was exceptionally disruptive by many measures, particularly in the sharp decline in consumer spending in the first half of last year. Temporary supply disruptions resulted in short-term price increases for some goods and services, but the broad impact of collapsing demand was disinflationary. That risk has since faded, replaced by growing concerns of undesirable inflation pressures taking root, fueled by massive fiscal and monetary stimulus and the Fed’s stated intention of allowing inflation to exceed the central bank’s 2% target for some period. Although the CPI is set to rise in the coming months, a range of factors suggest that intermediate-term inflation pressures should remain relatively muted. History provides a glimpse of what to expect.

Inflation typically trends lower after the cyclical peak in the economic cycle, and tends to remain well-below prior cyclical peaks well after a recovery begins. Economic downturns generally have a lasting impact on consumer and business behavior, creating a more cautious approach to consumption and investment. It takes time for excess economic slack to be absorbed, helping to keep upward price pressures largely in check.

Global economic slack, elevated unemployment, and demographic constraints on labor force growth in the U.S. are all disinflationary, and the economy is far from overheating. The potential for higher inflation ahead certainly exists but shouldn’t be overstated.

Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.

Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.

Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation. 

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