Read this post for insights into inflation, or the loss of purchasing power, which has become a big deal in 2022.
Click HERE to watch a 5 minute excerpt on inflation and interest rates from our recent 2022 market and economic outlook.
When I gave the presentation to our clients in January, I could have named the two most important topics of our time, at least the ones receiving the most headlines, as COVID and Inflation. But it is, by far, Covid that has had the largest effect. Inflation pales in comparison, as scary as it is! In January 2021, we had inflation of 1.4%. As of January 2022, suddenly inflation reached 7 percent per year. Now that was some kind of year, wasn’t it?
In our minds, we take what has just happened and turn it into a trend. We say, that means inflation is going to destroy my retirement income! That means I will be filling my grocery card with ramen noodles! But one year of drama does not a trend make. One year of price increases does not destroy a retirement.
What is happening is what some economists call a wage price growth spiral:
Wages are going up.
Prices are going up.
The more the prices go up, the more workers demand higher wages.
The more the wages increase, the more employers have to raise prices.
You get the picture?
Spending on services would help. Spending at restaurants and travel help the economy, move the money around, and generally keep people employed but we need to get out of the virus!
Interest rates are still stubbornly low. If you bought a bond from the US Government, they would pay you less than 2% every year and not give you your initial investment back for 10 more years. If inflation is 7%, then you are losing, let’s be kind, only 5% per year.
This is crucially important: when real yields are hugely negative, as they are today, this provides fuel to the inflationary fires, because the return on cash and cash equivalents are so miserable that it destroys the demand to hold cash. So what do we do?
We spend more money. What happens when we spend money? Prices go up. First the demand, then the supply. Think about the grocery store. You’ve seen the empty shelves and the higher prices at the grocery store.
In my opinion, inflation may be with us for a while, but not likely as high as it was over the previous 12 months. And high wages are likely to stick around. As with so many things in life, too much of anything is generally unhealthy. Too much inflation and we worry. Not enough inflation, and we worry. Over the next 12 months, inflation will continue, say our experts, but at a lower rate.
As always, we thank you for your trust, and we welcome questions you may have about the investment landscape or your portfolio.
About Karl Frank: https://www.assetsandincome.com/our-team/karl-frank