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Key Points for the Week

  • Inflation data will likely heat up temporarily as the deflationary months during the most severe lockdowns in 2020 are replaced by above-average inflation. Producer prices rose 4.2% over the last year.
  • The jobs market is showing mixed signs as initial unemployment claims increased by 16,000 last week while job openings rose 268,000 in February as restaurants picked up hiring.
  • U.S. Service businesses are experiencing growth based on a non-manufacturing report of 63.7, which was the highest reading ever and well above expectations of 58.5.

Investors didn’t stumble over inflation last week. Why not?

Inflation – rising prices of goods and services – can be measured in a variety of ways. For example, the Consumer Price Index considers changes in the amount consumers pay for goods and services – a bag of carrots, a gallon of gas, or a doctor’s appointment. The Producer Price Index (PPI), on the other hand, considers changes in the amount producers – such as farmers, manufacturers, or physicians – charge for goods and services.

Last week, the Bureau of Labor Statistics reported the PPI increased by 1 percent month-over-month in March 2021. It was twice the increase forecast by economists. On a year-over-year basis, the PPI was up 4.2 percent, which was the biggest gain since 2011, reported Reade Pickert of Bloomberg.

It’s important to pay attention to comparisons. The year-over-year PPI reflected prices from last March, after the pandemic had affected demand and prices dropped lower. Bloomberg explained the phenomenon may continue for several months:

Given major inflation metrics declined at the start of the pandemic, year-over-year figures will quickly accelerate – a development referred to as the base effect. The upward distortion will also appear in the closely-watched consumer price index report on Tuesday.


Last week, Fed Chair Jerome Powell talked about inflation, too. He didn’t focus on year-over-year comparisons. Powell told an International Monetary Fund panel inflation may increase as the U.S. economy reopens because supplies are tight. However, he expects the increase to be relatively short-lived. “Persistent inflation that goes up year after year…tends to be dictated by underlying inflation dynamics in the economy, as opposed to things like bottlenecks. The nature of a bottleneck is that it can be resolved.”

Powell emphasized price stability is one of the Fed’s mandates and, if inflation becomes concerning, the Fed will act. The Fed’s other mandate, full employment, is the more pressing concern. Powell said, “The unemployment rate of the bottom quartile of earners is still 20 percent. The higher end of the labor market has virtually recovered, but not the people in the bottom 20 percent…It amounts to nine or 10 million people…who were working in February of 2020 that are still unemployed.”

Last week, the Standard & Poor’s 500 Index opened above 4,000 for the first time and finished the week higher, reported Alexandra Scaggs, Barbara Kollmeyer, and Jacob Sonenshine of Barron’s.

This Week in the Markets

Producer prices climbed 4.2% last week. Energy prices contributed to the largest gain since the index rose 4.5% in September 2011. The jobs market continues to see a high level of initial jobless claims while steady progress is being made in reducing the number of unemployed receiving continuing benefits. Last week initial claims rose 16,000 to 744,000 and continuing claims dipped by 16,000 to 3.7 million.

U.S. service businesses are finally experiencing a comeback. The ISM non-manufacturing index rose more than 8 points to an all-time high of 63.7. All business sectors experienced gains in March. Employment has been the slowest part of the index to recover but has made great strides. Business activity and new orders have been the strongest segments. Stock markets reacted positively to the week’s events.

This week will be a busy one for data releases. Retail sales and industrial production from the world’s two largest economies will headline the week’s releases. Inflation has been a hot topic, and the U.S. and the eurozone will also release Consumer Price Index data.

The Inflation Outlook

Starting in 1972, inflation twice surged above 10% over the next decade. During this period the pricing mechanism was not right in the U.S. economy.

Some investors are worried we are about to experience a repeat performance. The Federal Reserve has supported the economy with very low interest rates and ample quantitative easing. The purchase of government bonds by the Fed has also helped the federal government run higher deficits without facing the risks of rapidly increasing interest rates. It seems like the seeds of higher inflation are being sown.

Yet, our analysis shows the concerns are present and policy mistakes by politicians could trigger a repeat of high inflation. However, the risks of 1970s inflation or even inflation that is half that high seem relatively small and manageable. A big reason is the differences between the 1970s and the 2020s are large, and the trend has moved decidedly in favor of lower inflation in the last 50 years.

The economic conditions were quite different in the 1970s. The U.S. is producing more of its own energy today making it less dependent on foreign oil. Furthermore, energy is less important to the economy. U.S. energy intensity fell about 2% a year from 1970 until 2011. In the last decade, the introduction of hybrids, electric cars, and additional forms of renewable energy have further undercut the power of a potential energy shock on the U.S. One of the drivers of inflation in the 1970’s was our dependence on foreign oil. OPEC was dominant and could control the supply and therefore the price of oil.

The 1970s also coincided with Baby Boomers entering the workforce and buying their first cars and homes. That demand helped to push prices higher. Raising prices is much more difficult today than in the 70s. First, pricing information is readily available, so the penalty for raising prices can be felt more swiftly than in the past. The types of industries generating demand are also less prone to price increases. Technology-focused businesses look to improving performance and achieving wider reach rather than increasing prices. Global competition makes price increases hard to implement as there are more true competitors. Autos are a good example. In the early 70s, the “Big Three” had nearly an 85% market share. By 2018, it was 44% as foreign manufacturing increased competition.

The lack of inflationary pressure in the economy was witnessed just before COVID-19 and shows how the economy has changed. Unemployment had reached a 50-year low; yet, the Fed was cutting rates because inflation remained below the desired level. The same unemployment rate 50 years ago likely contributed to a period of rising inflation. We live in a different world, and a low-inflation mindset remains.

The next few months will likely show increased inflation. We see this as a temporary statistical effect. Yearly comparisons are dropping off months last year when price increases were negative, but they still include the mid-year price rebound. Some inflation measures may creep over 3%. Supply disruptions or demand shifts may push the prices of some goods sharply higher for a few months. These are likely to be temporary.

Those forecasting a return to high inflation are likely to be disappointed, especially if they end up on the Price Is Right. Contestants win by guessing the closest price without going over the actual value, and it seems like those fearing the worst are estimating too high.

April is Financial Literacy Month

It’s also National Canine Fitness, National Fresh Celery, and International Guitar Month (among so many other designations).

So, what is financial literacy? In 2008, the President's Advisory Council on Financial Literacy defined financial literacy as “the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being.” A lot of skills fall into that category, including budgeting, saving, and investing.

One aspect of financial literacy that is becoming more important is the way memory and aging affect financial decision making. Prior to the pandemic, the FINRA Investor Education Foundation and the Rush Memory and Aging Project explored this issue from several perspectives and discovered:

  • Confidence in financial literacy appears to be good for brain health. One study found “…confidence in financial literacy is associated with a decreased risk of Alzheimer’s dementia and slower decline in cognition, above and beyond objectively measured financial literacy…While it is not completely clear why this relationship exists, it could be that confident people are motivated to engage with the world and actively seek to acquire new information.”
  • Overconfidence about financial knowledge may lead to risky financial behaviors. Older Americans are responsible for a significant portion of our country’s wealth. Common wisdom holds that risk tolerance declines with age. However, a separate study found this was not always the case. In particular, overconfident people – those who believed their financial knowledge was higher than it actually was – reported being more tolerant of risk. There was no evidence overconfidence made them more susceptible to scams or fraud.
  • Loneliness in tandem with low cognition can lead to poor decisions. A third study found loneliness, on its own, generally doesn’t appear to result in poorer decision making. However, loneliness in older people with low cognition may result in poor financial (and healthcare) decisions. The study accounted for differences in depressive symptoms, social network size, medical conditions, and income.

Financial decisions often become more complex as we get older. From retirement plans to estate plans, and from the cost of prescription drug benefits to the expense of chronic disease management, older Americans are asked to weigh outcomes and make financial (and healthcare) decisions. Being financial literate can help – and so can understanding the factors that may affect decision making as we age.

Commercial Flights

CTN 04-15-21 Image 1

Update on Unemployment Compensation Exclusion

The American Rescue Plan Act excludes up to $10,200 of unemployment compensation paid in 2020 from gross income. If married, this exclusion applies to both spouses. If a taxpayer's Modified Adjusted Gross Income (MAGI) is $150,000 or more, the exclusion is not available.

According to updated instructions recently issued by the IRS, unemployment income is not included when calculating MAGI for purposes of the unemployment compensation exclusion. This is a reversal of the IRS's original interpretation of the provision. The exclusion is calculated using the Unemployment Compensation Exclusion Worksheet. Taxpayers filing Form 1040-NR are not allowed an unemployment compensation exclusion for their spouse.

For more information, please see

Be Aware of New Text Message Scam

The IRS and Security Summit have issued a warning regarding a new text message scam which cites the availability of an economic impact payment. The goal is to have the recipient reveal bank account details. If you have any questions about this scam, please contact us.

Did you Know? This Week in History

April 12, 1861: Civil War begins as Confederate forces fire on Fort Sumter

The bloodiest four years in American history began when Confederate shore batteries under General P.G.T. Beauregard opened fire on Union-held Fort Sumter in South Carolina’s Charleston Bay. During the next 34 hours, 50 Confederate guns and mortars launched more than 4,000 rounds at the poorly supplied fort. On April 13, U.S. Major Robert Anderson surrendered the fort. Two days later, U.S. President Abraham Lincoln issued a proclamation calling for 75,000 volunteer soldiers to quell the Southern “insurrection.”

As early as 1858, the ongoing conflict between North and South over the issue of slavery had led Southern leadership to discuss a unified separation from the United States. By 1860, the majority of the slave states were publicly threatening secession if the Republicans, the anti-slavery party, won the presidency. Following Republican Abraham Lincoln’s victory over the divided Democratic Party in November 1860, South Carolina immediately initiated secession proceedings. On December 20, the South Carolina legislature passed the “Ordinance of Secession,” which declared that “the Union now subsisting between South Carolina and other states, under the name of the United States of America, is hereby dissolved.” After the declaration, South Carolina set about seizing forts, arsenals, and other strategic locations within the state. Within six weeks, five more Southern states–Mississippi, Florida, Alabama, Georgia, and Louisiana–had followed South Carolina’s lead.

In February 1861, delegates from those states convened to establish a unified government. Jefferson Davis of Mississippi was subsequently elected the first president of the Confederate States of America. When Abraham Lincoln was inaugurated on March 4, 1861, a total of seven states (Texas had joined the pack) had seceded from the Union, and federal troops held only Fort Sumter in South Carolina, Fort Pickens off the Florida coast, and a handful of minor outposts in the South. Four years after the Confederate attack on Fort Sumter, the Confederacy was defeated at the total cost of 620,000 Union and Confederate soldiers dead.

Weekly Focus

It's paradoxical that the idea of living a long life appeals to everyone, but the idea of getting old doesn't appeal to anyone.

Andy Rooney, American Television Writer

The secret of getting ahead is getting started.

Mark Twain, American Writer