Inflation – Higher or a head fake?

Chief U.S. Economist Lara Rhame and Kara O’Halloran, Director, Investment Research, share their points of view on where they think inflation is headed. Is this another head fake?

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April 30, 2021 | 3 minute read

About this episode
In this episode, Chief U.S. Economist Lara Rhame and Kara O’Halloran, Director, Investment Research, share their points of view on where they think inflation is headed, both in the near term and forward-looking. Is this another head fake? Lara and Kara discuss what may come next along with potential market impacts.

Transcript excerpt:
Kara O’Halloran (00:05):
Welcome back to FireSide, podcast by FS Investments. I’m Kara O’Halloran, a member of our research team here. I am once again thrilled to be joined by my colleague, Lara Rhame, our Chief U.S. Economist, who is quickly gaining the title of podcaster in chief. She is such a good guest. I think everyone at FS is constantly fighting for her time. Lara, thank you so much for carving some out for us today.

Lara Rhame (00:31):
Absolutely. I mean, it’s so much more fun to talk to you than to stare at my screen and try to write something. Always happy to do this.

Kara O’Halloran (00:40):
Awesome. Well, I’m happy it’s an audio medium, too. We’re on a video call, so Lara can tell I am in the middle of moving, so I’m surrounded by cardboard boxes. We will see how that does for our acoustics, but I’m sure our team can fix any sound quality. I don’t think we could consider ourselves an economics and markets related podcast without an episode on inflation. For the last six months or so, there has been a lot of talk about it, after a decade of really, as we all know, very little inflation. Today, we are going to get Lara’s point of view on where she thinks inflation is headed, both in the near term, in the longer term. Is this another head fake? We will get into all of it, and of course we will tie in the market impacts as well. There is a lot to cover, so I’m sure we will barely scratch the surface here, but I would be surprised if this is the last time that we’re talking about inflation in 2021.

Lara Rhame (01:36):

Kara O’Halloran (01:37):
Let’s get into it. Lara, the pandemic has certainly had a huge impact on inflation. We really saw almost competing forces. We saw these deflationary pressures, as well as inflationary ones. Airline tickets last year were so cheap, understandably so, and yet my grocery bill has never been higher. I know I’m home a lot more, but it still seems a little high. Maybe to start out, you can talk through some of the impacts that we saw on inflation due to the pandemic and the economic shutdowns.

Lara Rhame (02:09):
Sure, happy to. I think, yeah, to your point Kara, inflation has probably never been more interesting than it is right now. It’s exciting that it’s reemerging, both in the near term, medium term, and long term as such a topic that really needs to be rethought, I think in a lot of ways. Okay, pandemic. Pandemic hits this time last year. From March 2020 to May 2020, we see energy prices get crushed. We see these small pockets that were really at the center of the target for the pandemic; airline prices, hotel prices just see steep declines. Then, on the other side of that, we saw food prices rise, durable goods prices, auto prices rose significantly right as the pandemic set in. That really did give us these competing forces.

Lara Rhame (03:09):
First of all, you just had the broad index fall significantly in those few months right as the pandemic intensified, and we’ve seen the overall, I think since the pandemic, one factor in and above all else has really kept inflation low, and that has been owner’s equivalent rent. It is the government’s attempt to [inaudible 00:03:39] to reflect the cost of shelter, and they do that through a proxy for rents. We’ve seen this before, this really odd dynamic where, when house prices rise and a lot of people are moving out of rental units into housing prices, and the pandemic intensified that because a lot of people moved out of high rent markets like New York and San Francisco into lower rent markets, the net effect being rents falling at the most macro level. All of that has, that index alone, that owner’s equivalent rent is about a third of the share of the core CPI, or a quarter of headline CPI. That has really put a damper on inflation over the course of this year. A bunch of opposing factors there that have kind of left us with a muddy inflation picture in the near term.

Kara O’Halloran (04:42):
Then, we wouldn’t be surprised to see these really work themselves out from these base effects. Right? I think we saw CPI jump in March already, so maybe can talk a little bit about that.

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Kara O’Halloran, CFA

Director, Investment Research

Lara Rhame

Chief U.S. Economist + Managing Director

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