Many Greenleaf Trust clients remember watching economist Milton Friedman’s 10-part public television series “Free to Choose” which aired in 1980. As one of the most prominent and influential economists of the era, Mr. Friedman’s views shaped public opinion about the economy. Two of Mr. Friedman’s quotes have been on our clients’ minds lately:

“Inflation is always and everywhere a monetary phenomenon.”

“Inflation is caused by too much money chasing after too few goods.”

These quotes have many clients hyper about hyperinflation. Over the past two decades, the US Monetary Base has grown by 11.4% per year. In just the past twelve months, it is up 52%.

At this rate of growth, inflation must be out of control, right? No. The latest US inflation reading came in at 1.4% growth year-over-year.

Well, maybe money supply growth affects the economy with a lag. Inflation must have been high after that rapid monetary growth through 2013, right? No. In fact, the US experienced a bout of disinflation as oil prices fell from $100 a barrel in 2014 to $30 in early 2016.

Looking at the last 60 years of US economic history, periods of faster growth in the monetary base have corresponded with period of slower and slower inflation, a dynamic that would surely puzzle Mr. Friedman.

This article will discuss our inflation outlook and why we are not feeling hyper about inflation in the US.

Savings vs Spending

In response to the COVID-19 recession, the US government enacted programs that the CBO estimates will increase the deficit by roughly $3.4 trillion. An additional $1.9 trillion proposal is currently being debated.

These programs not only filled the gap created by lost wages, but increased Personal Income in April by about 14% year-over-year, and by about 4% as of November.

Shouldn’t this additional income create inflation? Perhaps if it had been spent. However, in this case, the majority of US citizens chose to increase savings or pay down debt rather than spend.

Throughout the last expansion, from 2009-to-early-2020, the savings rate in the US averaged 7.3%. In April, it hit an unfathomable 33.7%. It remains elevated as of November at 12.9%.

High savings rates do have an impact, but not on inflation. These savings tend to make their way into the stock, bond, and real estate markets, impacting financial asset prices, not the price of goods and services. Indeed, in 2020 the price of US stocks increased roughly 20%, bonds increased roughly 7%, and home prices were up 9%.

The key question for the inflation outlook is: will high savings rates persist, or will they be converted into spending that might impact inflation?

What Did Get Spent?

So what did consumers spend on in 2020? Durable goods: cars, couches, RVs, boats, etc. Consumers took money they had previously spent on travel and restaurants and purchased durable goods instead. Inflation-adjusted durable goods spending was up nearly 13% over the past year as of Q3 2020.

Looking ahead to 2021 and beyond, we do not expect consumers to purchase a second boat, a second washing machine, a third car. That is important. These industries have high proportions of fixed costs and are the most susceptible to demand-driven inflation pressures. However, even with the unexpected demand in 2020, only used cars and trucks saw significant price increases (10%). Every other durable goods category experienced price increases of 5% or less.

Instead, we expect a rebalancing of the economy in 2021, led by growth in services spending after the vaccine campaigns are successful. Importantly, we do not expect significant inflation pressure despite our expectation for a pickup in demand for vacation travel, dining out at restaurants, and for returning to see the dentist. There is ample capacity in these industries to accommodate a significant increase in demand.

How Could we get High Inflation?

Recent history has shown that it is difficult for economies with aging demographics like the US, Europe, and Japan to generate sustained inflation. We believe the likeliest path to inflation in the United States would come from much tighter labor markets.

In February 2020, the unemployment rate was 3.5%. This was the lowest level since the late 1960’s. Even still, US workers were just finally beginning to make wage gains. Aggregate wage and salary disbursements had gone up about 5% and inflation was up 2.4%. Those are the ingredients for sustainable inflation.

Today the unemployment rate is 6.7% and we are 9.8 million jobs away from February’s level of employment. We expect weak labor markets to keep wage pressures subdued, savings rates elevated, and inflation much lower than otherwise might be expected simply by looking at the growth in the money supply.


We will continue to monitor the outlook for inflation in 2021 and beyond. So far this year we have taken note of increases in some commodity prices, and in increases in indicators of the market’s expectations for future inflation. We do expect some of the headline inflation readings to reach the mid 2%’s, mainly due to energy prices rebounding from extreme lows in March and April of 2020. However, we do not expect significant inflation pressures while the economy is still in the early stages of recovery from the COVID-19 recession. That is true whether or not the currently-debated stimulus package is enacted and true even though we expect the monetary base to continue its decades-long expansion. If you are interested in discussing these ideas further, please contact a member of your dedicated client centric team.



Bureau of Economic Analysis

Congressional Budget Office

BGOV, Bloomberg Government

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