Inflation will 'ease significantly' after it increases to around 3% in 2021: Economist

RSM Chief Economist Joe Brusuelas joined Yahoo Finance Live to break down what investors can expect from inflation rates in 2021 and what this means for the American economy.

Video Transcript

JOE BRUSUELAS: So I think that inflation is going to increase to a top line of around 3% this year, and then it's going to ease significantly. If you look at some key financial metrics, say the spread between 10 and 5-year break-evens, market's just pricing in a short-term bout of inflation that matches up with Mr. Powell's view. Now, I would make the case that Mr. Powell did introduce a new line today. He said that he did not expect inflation to be particularly large, nor persistent. And it would seem to me that's the transition away from the word transitory that the Fed's been using.

I think Mr. Powell did a very good job today laying out the case that, hey, the economy's not quite back yet. Yeah, I'm expecting a 7% rate of growth this year. But you know what? 10% to 15% of our $22 trillion economy's still impaired, largely in the service sector.

Well, I know we all talk a good game about the economy's back, and, you know, if you're looking at the production of goods, manufacturing, things are looking pretty good, but the service sector's still on its back. Between 25% and 40% of all of the small businesses that were open prior to the pandemic are not open. Moreover, you're just not going to see the wage push type inflation that you need to to get to that type of 1970s style inflation that the market's talking about. I think we've got a real risk of some market mispricing in terms of prices on fixed income instruments, and, of course, the yield on the 10-year Treasury.

ADAM SHAPIRO: Joe, it is great to see you. It's been too long, so I'm glad you're joining us this afternoon. It's Adam. And I got to ask you, on a day when crude, WTI, has fallen below $58 a barrel, I got a buddy who runs a plumbing supply business who says that the price of everything, and this guy supplies businesses as well as home builders, everything's going up.

And he uses the example of PVC. And then he says the people who make the resin are having shortages. They can't make enough resin to make the plastics, blah, blah, blah, inflation. Why are so many people convinced that inflation won't be an issue, that we won't come to expect that prices will be more expensive because there are these supply issues?

JOE BRUSUELAS: OK, there are supply issues linked to disruptions of global supply chains caused by the decisions around the pandemic. These are things that in a short period of time, say 12 to 18 months, will resolve themselves. Look, we had a near catastrophic collapse of the energy grid here in Texas. I'm talking to you from Austin, Texas.

That winter storm did real damage to the production of chemicals along the Gulf Coast. I understand why the price of resins is going up. I understand why PVC piping is in-- and there are some supply constraints around that. Yeah, this doesn't mean you're going to see A, a permanent increase in bottlenecks that results in a shutdown of supply.

Second, what we're seeing here is a good thing. You should expect to see demand increase coming out of what was the single largest shock to the US economy since the Great Depression, right? Over time these things will work themselves out, and you're just not going to see a permanent increase in the price level.

And that's got to do with the structural transformation of the US economy away from a manufacturing-based economy to one that was based on services to now it's one organized around digital technology. And as you know, Adam, we've talked about once you digitize something, the price of reproduction, distribution, and access tends to fall to zero, that's disinflationary, and that's going to offset the temporary increase in prices for a lot of things in the commodities complex.

SEANA SMITH: Joe, let's talk about Treasury Secretary Janet Yellen's comments on taxes, because that's another thing that's getting a lot of attention today. She was saying that she does expect to examine changes in tax policy, that President Biden's future policies would need to be offset somehow. Raising taxes now, how big of-- is that the right move? I guess that's the big question here. Is it right to do that when we're in this stage of the economic recovery?

JOE BRUSUELAS: My sense is, is that that may be premature. You know, if I was king for a day and I was running policy, I'd aim towards growth to increase the pace of revenues to offset some of the-- the increase in the annual operating deficits. But make no mistake about it, at one point we will need to see some significant tax reform in order to align the country with where the economy is and to increase productivity, which means organizing this economy around the digital transformation that we all see.

I did notice, though, questions from Josh Gottheimer around state and local tax deductions. Let us be blunt here. Those-- that was used as a political weapon by the Trump administration to target blue states and blue cities. To me, that's probably not the sort of tax code you want.

It exacerbated and enhanced many of the social divisions. So Mrs.-- Miss Yellen's comments were well-taken. And it'll be interesting to see how that evolves because, obviously, a lot of our viewers here, they're all over the world, but we do have them in New Jersey, Connecticut, New York, California, and this is more than just a passing fancy for those constituents of the Biden administration.