Inflation

By Macy Jae Moore on June 16, 2022

Written by: Paula Sandlin

Imagine you are a contestant on Jeopardy and the answer to your daily double comes up as bouncy houses, balloons and waistlines. The question would obviously be “What are things that are inflated?”  Bouncy houses and balloons signal party time and at least a two-hour window of happy children. However, inflated waistlines lead to a vast array of health problems, giving way to supplements and health gurus promising to combat inflammation and transform you into your best self. But what if the answer was the US economy and prices? Perhaps in the last two years, with a pandemic, supply chain challenges and the eastern European war of our generation, you would ring in with the correct question, “What is Inflation?”

Inflation regarding the economy, in its simplest definition, is the loss of purchasing power for goods and services over a specific time period. Our cost of living is increased as we must spend more in order to pay for the same goods and services.  The inflation rate is a vital economic indicator informing us how rapidly prices are rising. If you drive a car or buy food, inflated prices are at the forefront of spending. Restaurants have signs posted that food costs are up, so they are obligated to pass that along to patrons. Unfortunately, these employers have also resorted to being transparent in letting us know that “due to being short staffed, we are unable to serve you.”  Dining out has its price, (No pun intended) as restaurants have done their fair share of suffering recently. Gas prices continue to rise, hitting a national average of $4.24 per gallon. Summer travel which increases demand, and rising oil prices, now at $105 a barrel, will cause pressure at the pumps. The rising costs of fuel affect not only car drivers but also cargo and other transportation and shipping industries. Higher costs are passed down from freight carrier to shipper to consumer to make up for the increased costs. Inflation in the United States climbed to its highest level in 40 years in March to 8.5% according to the Bureau of Labor Statistics. The core rate of inflation filters out volatile food and fuel costs, yet still leaves us with increased prices in other sectors of spending. Electricity, shelter, and automobiles are also contributors to the increase.  I would be remiss in mentioning that the Dollar Tree stores, where everything is a dollar, has changed to “Everything is $1.25.”  For those of us who enjoy the bargain shopping experience, we are now compelled to make a non-impulsive shopping list before venturing out to spend our dollars, since the Dollar twenty-five Tree has shifted with the inflation curve. 

In any environment, economists prefer a stable, low level of inflation that encourages steady levels of spending. Inflation is typically worse on low-income households, and those with fixed incomes. Low-income households and fixed incomes may find it difficult to pay for essentials like food, housing and gas.  As for the stock market, company margins might be compressed as they have to pay more for inputs such as raw materials and wages.  However, companies that pay a dividend also become more attractive versus companies that don’t, since investors prefer cash today in an inflationary environment.

The basic law of supply and demand states that when supply goes down and demand stays the same, prices will increase. This is where we are today. If consumers continue to buy goods and services, businesses will most likely raise their prices based on this demand. In addition, companies may charge more as they realize they can improve profits without sacrificing customers.

So, is inflation good or bad? Consumers who collect paychecks can perceive inflation as good or bad depending on wages.  If your pay increases faster than prices, you may find yourself better off even with price inflation. However, high inflation can prompt the Federal Reserve (often called “the Fed”) to raise interest rates to slow demand. When done too quickly, recession can follow.  The Fed recently announced a hike in interest rates by half a percentage point, bumping the federal funds rate to a target of 0.75 to 1.00 percent.  This came on the heels of an increase of 0.25 in March, and all eyes are on what comes next. Moving the economy to a soft landing is the Fed’s intent. Time and circumstance will inform their level of success.

My grandparents were alive during the Great Depression. I remember a story my grandmother told of a trip to the grocery store in 1933 to buy hot dogs, which were at the cheaper end of the poultry food chain. The price was ten cents per dozen. She only had nine cents to her name, so she confidently requested nine cents worth of hot dogs. She walked out with most of her weeks’ ration of meat. My grandmother would be overjoyed to know that today a Costco hot dog and soda value meal costs $1.50, the same as it did in 1985.

It has been decades since we saw inflation readings like we are seeing today. Many people remember the 1970’s and the long lines to buy expensive gasoline. There are reasons to believe that inflation is decreasing. Target and Walmart recently shared in their quarterly earnings calls that consumers have shifted spending from discretionary purchases like TVs and clothing to staples like groceries. Both retailers over-ordered discretionary items and are now overstocked. People have shifted spending to experiences such as travel as well. Additionally, household savings rates have decreased, and more people have gone back to work, which indicates that much of the excess cash that households received or saved during the pandemic have declined. These factors will reduce demand, and over-ordering by retailers has increased supply. We don’t have a crystal ball, but it is possible these factors, along with the Fed’s actions, will reduce the rate of price increases. In the meantime, we think the best approach for managing our wealth through higher inflation is to stick to our financial plan and stay invested in quality companies.

Paula Sandlin – Senior Private Wealth Specialist psandlin@twickenhamadvisors.com

Disclaimer

Hightower Advisors, LLC is an SEC registered investment adviser. Securities are offered through Hightower Securities, LLC member FINRA and SIPC. Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material is not intended or written to provide and should not be relied upon or used as a substitute for tax or legal advice. Information contained herein does not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Clients are urged to consult their tax or legal advisor for related questions.