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Inflation and Disinflation in Today’s Market

February 15, 2022
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December’s Consumer Price Index (CPI) data provided a picture of the inflationary forces impacting our economy during the 2021 period and leading into 2022. The CPI rose 7% in 2021, the largest 12-month gain since 1982. The Federal Reserve is currently proposing a series of interest rate hikes in 2022 to cool the heated economy, though some experts predict there are potential signs of inflationary components that may have peaked and are starting an overall phase transition to a transitory disinflationary environment.

Under the hood of the CPI, energy and commodities rose +5.9% MoM (month to month) for December, which is considered by some to be contrary to the monthly moves in various underlying components, like domestic steel, natural gas, etc.  Historically, business cycles oscillate between Growth and Inflation, whereas four environments can be present based on either component in an acceleration or deceleration trend from a rate of change basis.  It’s clear the economy has been maneuvering through a growth and inflation-accelerating environment for several quarters.

Of course, it is easy to assess what has already happened leaving the real challenge for what may be ahead.  If a phase transition is underway and the economy is moving into a decelerating growth & disinflationary environment, do rate hikes by the Federal Reserve pose a risk of pouring gas on the fire?  What is clear, in a disinflationary environment core input costs become cheaper, which becomes a tailwind for development cost.  Some experts believe raising rates into a decelerating growth and disinflationary environment could quickly become the opposite for a Fed reversing course to dampen the fire by cutting rates.  In this scenario, theoretically, you would have lowering input costs and low cost of borrowing leaving in question how volatile the overall markets become while adjusting to the degree of changes in growth, inflation, and Fed intervention.

The fact is there are currently heightened uncertainty and volatility in the market, with wide fluctuations in material pricing and construction costs.  Given Moran’s decades of weathering economic turbulence, we are well-positioned to advise and assist in the mitigation of construction-related risk no matter what economic scenario plays out.

By Chris Roberts