The Tangled Tale of Transitory Inflation (Sponsored Content)

David Mitchell: The Fed's 2% inflation target is no longer reasonable.

Like other business owners, Titus Williams, president of Prosperiti Partners LLC, is tracking the spike in inflation as he makes investment decisions. Inflation is on track to reach 5%, according to the Federal Reserve, the result of tangled factors including supply chain issues, greater demand for goods, an influx of cash via the federal government and a worker shortage.

“There’s lots of things happening right now that are unique in nature,” Williams says.

Economic researcher and professor David Mitchell of Missouri State University agrees.

“The pandemic has really thrown a lot of things into disarray,” says Mitchell, “so you have all of these different types of factors.”

Inflation has been a part of our nation’s fabric since the revolutionary war, he says. But the unusually high level of inflation as a direct result of the pandemic is historic.

Because the economic future is unclear, Williams says investing in real estate is good business. He’s selective about what types of real estate has the best rates of return to safeguard his investments for the future, despite – or perhaps because of – today’s inflation.

“No. 1 is habitational real estate. Because you have short-term leases, you have the ability to hedge your bet against inflation,” he says. “If you see inflation happening, you can adjust your rental rates accordingly. The other benefit is, people are always going to need a place to sleep at night.”

He also likes industrial or warehouse real estate, especially now with supply chain constraints. As companies begin to eschew just-in-time warehouse models in favor of stockpiling goods, they will need more storage space.

Financial experts expect overnight interest rates to rise in the next year or two as a tool to tame inflation. By investing now, Williams and other investors can lock in capital costs at low interest rates.

To help him make sound decisions, Williams follows population and demographic trends; checks local rental rates and expense ratios; and studies the local market for areas worth investment. He also follows what’s happening at the Federal Reserve. Whether consumer prices – up more than 4% over a year ago – will fall to the Fed’s preferred level of 2% over the next year or so is unclear.

According to Fed Chair Jerome Powell, reasons for the escalating inflation include supply chain bottlenecks and slowing job growth as a result of the pandemic. Powell has previously called current levels of inflation “transitory.” While maintaining they likely won’t stick and that supply and job growth issues will ease, Powell acknowledged during an Oct. 22 virtual conference that “with these supply constraints and shortages, and therefore elevated inflation, they are likely to last longer than previously expected – likely well into next year. And the same is true for pressure on wages.”

However, Mitchell, who also directs MSU’s Bureau of Economic Research and Center for Economic Education, no longer thinks 2% inflation is reasonable.

“It doesn’t change the fact that over 30 to 40 years over a normal working career, a 2% inflation really adds up; it’s your assets,” he says.

Mitchell also doesn’t think current inflation levels are transitory “because once people get into their minds that it’s not transitory, then inflation is no longer transitory,” he says, calling that a problem and why he thinks interest rates must rise to ease inflation.

“If (the Feds) don’t get on top of it quickly,” he says, “it’s going to run away from them.”

That won’t fix inflation while supply chain bottlenecks are in place. And it’s no guaranteed solution with the worker shortage and growing wages that Mitchell expects to stay. In addition, he says, the reduction of just-in-time warehousing will result in higher costs to businesses, which will pass to consumers.

“There’s a saying that inflation is ‘always and everywhere a monetary phenomenon,’” Mitchell says, noting what economists mean is that the rate of inflation is directly related to how many dollars are being printed. “And the thing about inflation is that once people get it into their mind and they expect an inflation rate of 5% or 6%, they’re going to demand from their bosses wage increases of 5% or 6% or whatever. People aren’t going to be happy with a 2% or 3% raise. They’re going to say ‘Hey, you’re giving me a 2% raise, but prices went up 6%.”

That leads people to leave jobs.

“It’s difficult to break that mindset,” he says.

Williams says local businesses will feel the pinch of inflation, especially related to supply and demand. Still, he thinks the Springfield area business community is more fortunate than many.

“We’re not perfect by any means, but we have good leadership in our city, which allows for our economy to still be moving forward,” Williams says. “Even though we had a shutdown, our economy didn’t really stop all that much. People were affected, but it wasn’t falling off a cliff. Other nations and other cities have fallen off a cliff, so we are lucky to live in Springfield, Missouri.”

This sponsored content brought to you by Prosperiti Partners LLC.