Inflation: Boogeyman or… is it Time to Boogie, Man?

As our country progresses towards full reopening, the headlines foretell of a re-emergent fear: inflation. Some of us can vividly remember the major economic repercussions of the 1970’s caused by runaway inflation, so it’s not unreasonable that inflation strikes a chord. Most of us would agree that in recent years, prices for pretty much everything have seemed to increase (in some cases substantially) despite the fact that there “hasn’t been any inflation”.

The below visual shows modern day history of inflation using the Consumer Price Index “CPI” which has many versions, but ultimately it is a widely used metric to gauge price increases (i.e. inflation) on a representative basket of goods within an economy. The grey bars signify recessions.

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As you can see, inflation can be volatile but has trended overall lower in recent decades.

Seeing the inflation mayhem of the 1970’s, one may find it curious that the U.S. Federal Reserve (“the Fed”) has been trying to induce inflation. The Fed now has an “average inflation target” of 2% which means that if inflation runs hotter than their actual target of 2%, they won’t necessarily react to cool the economy by raising rates. The Chairman of the Fed, Jay Powell, said this recently:

Trends serving as headwinds to inflation:

• Rising interest rates
• Technology innovation
• Increasing savings rates for Americans that have discretionary income
• Consumers acting “gun-shy” from their experiences in recent recessions (2008 and 2020)
• Stagnant wage growth
• Age demographics: the older an economy’s population is = less inflationary pressure
• Low rate of population growth (U.S., China, Japan, Europe)
• Consumer trends shifting from material goods to experiences
• Strong corporate competition

Trends serving as tailwinds to inflation:

• An increasing money supply & increasing velocity of those dollars through the economic system
• Fiscal spending (stimulus payments/programs, PPP loans for businesses, large spending bills like infrastructure…etc)
• Central bank liquidity injections, such as Quantitative Easing
• Low interest rates
• Growth in equities markets
• Consumers spending more as the pandemic wanes
• Demand outpacing supply for certain products/services (presently available housing and building materials are great examples of this)
• Corporate America deploying its historic levels of cash (returning to shareholders or funding growth initiatives)

This next visual depicts times in recent history where we were in a low but rising inflationary environment (4 separate times since 1988) and the corresponding average rate of return for major investment asset classes during those time periods. As you can see, it has historically been a very good time to be an investor in this type of inflationary environment.

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Here are our takeaways:

1. We do see short-term inflation rising out of recent doldrums as GDP makes a substantial comeback in 2021 and 2022. However, like the expected surge of rebounding consumer spending/GDP growth following the pandemic, any spike has a high probability chance of being temporary in nature.
2. It’s clear that there are strong variables working for and against inflation looking beyond the immediate-term helping to keep the probability of hyperinflation minimized.
3. If inflation does accelerate well beyond the short-term, that would indeed be a very positive sign that the economy is booming. In this scenario, the Fed had plenty of tools to combat uncomfortable levels of inflation like raising rates (which are historically low as of the time of this writing) and ending/reversing their expansive Quantitative Easing programs.
4. It’s a good time to be an investor: We just emerged from a substantial (yet acute) recession and communities are making a comeback all around the globe. Interest rates are historically low, which has helped millions of Americans improve their debt picture (mortgage refinance anyone?) and has made the cost of capital for our businesses historically low. Home prices have on average increased substantially; the equity markets have also seen sizable growth, but valuations don’t appear to be overstretched based on corporate profits and fundamentals. The global economy is on a positive path and we should remain optimistic about our collective futures!

Despite the generally upbeat view discussed above, we continuously dissect the markets and vet strategies through a contrarian and objective lens as we look ahead, constantly refining our outlook and the perspective we bring clients.

Bottom line for now… Instead of becoming engrossed in the Boogeyman inflation headlines, it’s time to break out those dancing shoes and boogie, man!

Alex Lippert is a partner of Steadfast Wealth Co. and serves many of our Alliance families as their financial plan advisor. He finds personal satisfaction in seeing the granular analytical side of portfolio management transform from the numerical and theoretical level, into impactful outcomes for clients. He earned his Bachelor of Arts degree from the University of Puget Sound, double majoring in International Business (emphasizing Finance) and in Mandarin Chinese. He maintains the Accredited Wealth Management Advisor (AWMA®) and the Chartered Financial Analyst (CFA) designation.

Alex has recently co-authored a book with Joel Malick, aimed at helping clients better prepare for the non-financial side of the retirement equation titled afterwork, an honest discussion about the retirement lie and how to live a future worthy of dreams. Visit www.theafterwork.net for more information.

The above material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or stocks in particular, nor should it be construed as a recommendation to purchase or sell a security. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. 3613999 DOFU 06/2021

1. Source: BLS, FactSet, J.P. Morgan Asset Management. CPI used is CPI-U and values shown are % change vs. one year ago. Core CPI is defined as CPI excluding food and energy prices. The Personal Consumption Expenditure (PCE) deflator employs an evolving chain-weighted basket of consumer expenditures instead of the fixed weight basket used in CPI calculations. Guide to the Markets – U.S. Data are as of March 31, 2021.
2. CNBC; Fed’s Powell just talked up a classic Buffett market bogeyman Inflation, January 31, 2021. https://www.cnbc.com/2021/01/31/fed-talks-up-old-buffett-market-bogeyman-inflation.
3. Source: J.P. Morgan Asset Management. *High or low inflation distinction is relative to median CPI-U inflation for the period 1988 to 2020 (33 years), which was 2.5% y/y. Rising or falling inflation distinction is relative to previous year CPI-U inflation rate. Indices: Bonds – Bloomberg Barclays U.S. Aggregate; Cash – Bloomberg Barclays 1-3 Month T-Bill index since its inception in 1992 and 3-month T-Bill rates prior to that; U.S. high yield – Bloomberg Barclays US Aggregate Credit (corporate high yield); Equities – S&P 500; Value – Russell 1000 Value; Growth – Russell 1000 Growth; Small Cap – Russell 2000; EM equity – MSCI Emerging Markets (USD); REITs – FTSE NAREIT/ All Equity REITs; Commodities – Bloomberg Commodity Index since its inception in 1992 and S&P GSCI prior to that; Gold – NYM $/ozt continuous future closing price. For illustrative purposes only. Past performance is not indicative of comparable future returns. Returns are based on calendar year performance and are total return unless otherwise specified. Guide to the Markets – U.S. Data are as of March 31, 2021
4. Median Sales Price of Houses Sold for the United States https://fred.stlouisfed.org/series/MSPUS