Is Low Inflation Here to Stay?

Is Low Inflation Here to Stay?

Many factors are keeping it down, despite continued economic growth.

Inflation in the United States has proven to be an atypical aspect of the current economic recovery. With President Trump’s economic policies, many market watchers expect the economy will undergo further expansion and cause inflation to pick up.

However, there are a few dynamics in place that may keep inflation low for longer, according to Segal Marco Advisors.

“Typically, inflation is a sign that an economy is indeed growing,” said Tim Barron, Chief Investment Officer at Segal Marco Advisors. “We have seen over the past eight years, however, that this is not always the case, and sometimes inflation can lag growth.”

One piece of the inflation picture that has been relatively weak in the current recovery is wage growth. Since 2010, wages have grown around just 2.5 percent per year, with inflation around or below 2 percent. Former Fed Chair Janet Yellen had said that wage growth of 3 or 4 percent is considered “normal.” David Pappalardo, Leader of the Segal Marco Advisors’ Advisor Solutions Group, noted, “The level of wage growth is not occurring in the robust, sustained enough way that would encourage inflation.”

Other key factors that may be holding inflation down include:

  • Cautious business spending: many companies have held on to cash instead of putting money back into their businesses. “This gives company management and shareholders comfort that their investments will not founder, but it also means that these companies likely are not growing as much as they could,” said Catherine Hickey, vice president, research with Segal Marco Advisors.
  • Public expectations: “There may also be a psychological element at work here,” added Barron. “The public may just expect low inflation now, with 2 percent as a ceiling. A move much further above 2 percent may actually have a predetermining effect on inflation.”
  • Rise in productivity in the developing world: “Goods from emerging markets often are not as expensive to buy as those made in other developed markets, and such a wide availability of cheap goods means consumers won’t pay more for goods and services,” noted Pappalardo. “Lower energy prices have also helped keep prices of imported goods from the developing world.”

The bottom line, according to Ms. Hickey, was that inflation has proven to be elusive in the past, and there will be many factors pushing and pulling it in different directions in the future. “Given the uncertainty of what will be enacted and how markets operate, to bet one way or the other on the effect of tax reform and other policies is simply speculation.”

For more information or to speak with a consultant about how investors can stay ahead of the market in today’s changing landscape, please contact Todd Kohlhepp.

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Segal Marco Advisors, a member of Segal, provides trusted advice that improves lives. Segal Marco delivers innovative, client-driven investment consulting advice, outsourcing solutions, proxy voting and corporate governance services. Clients include joint boards of trustees administering benefit plans under the Taft-Hartley Act, state and local governments, corporations, non-profit organizations, endowments and foundations. The firm works with financial services firms through Rogerscasey, a Division of Segal Advisors, and with Canadian clients through Segal Rogerscasey Canada.