Economist and investment advisor Gary Shilling isn't worried about rising inflation despite growing reflation concerns on Wall Street and the roughly 65% increase in 10-year Treasury note yields since early January.
"There is no question the consensus is that there will be inflation, but what causes it?" asked Shilling. "I continue to believe the fundamental cause of inflation is demand exceeding supply and that is clearly not the case today."
Shilling, co-founder of A. Gary Shilling & Co. and a longtime bond market bull, expounded on his relatively dovish view of inflation as he challenged the multiple reasons that many Wall Streeters cite for their inflation fears.
1. People Won't Spend All Their Stimulus Money
To date, most American households have or will soon have received more than $6,000 in economic relief checks from the federal government — $2,400 from the CARES Act, passed in March 2020, $1,200 from the economic relief of December 2020 and $2,800 from the American Rescue Plan.
That's led many strategists and analysts on Wall Street to expect Americans will spend much of those funds following a year when they spent very little because of the coronavirus pandemic, leaving consumers with a surplus of pent-up demand to satisfy.
Shilling doesn't buy that outlook and cites instead a report from the Federal Reserve Bank of New York that showed Americans on average using about 70% of their CARES Act relief checks to save or pay down debt and the Federal Reserve Board report from 2019 finding that 12% of adults would not be able to cover a $400 emergency.
"All the layoffs have really scared people into saving," Shilling said. Many also have lots of debt, together with fear of job losses creating "a lot of incentive to save and pay off debt. He noted the U.S. savings rate jumped to 20.5% in January.
Shilling concedes that consumer spending will increase as the economy opens up but he doesn't expect the "huge burst" of spending that many expect. Many workers will also be spending less because they will continue to work at home, Shilling said. They won't be spending on commuting, eating out lunches or buying work attire. "We will see continued saving, not wild spending."
2. Wage Inflation Isn't a Problem
Shilling isn't worried about wage inflation, which he says hasn't existed since globalization began a dominant force in the world economy three decades ago. He also cited the failure of Democrats to increase the minimum wage and the decline in the labor force participation rate, which was 61.4% in February, the lowest level in at least 20 years, excluding April and May 2020, near the start of the pandemic. "People are in no rush to leave home and look for jobs," Shilling said.
3. Commodities Inflation Is Temporary
Commodity prices periodically peak during stressful times like war and product embargoes, like the oil embargo in the 1970s, but the price increase historically doesn't last, Shilling said.
