“Inflation is when you pay $15 for the $10 haircut you used to get for $5 back when you had hair.” (Sam Ewing – Former Baseball Player (he batted left and threw right))
Unless you’ve been under a rock, you’ve likely noticed the word Inflation plastered all over the news headlines. While Mr. Ewing’s quote above is somewhat comical, the definition of inflation I like to use is “Too much money chasing too few goods.” So, lets look at both sides of this definition.
Too Much Money
Picture yourself back in March of 2020. This virus was wreaking havoc on human lives and the best way our leaders felt we could stop its spread, is by slowing human contact. And the best way to do that, shut things down…schools, business, barber shops, theme parks, airlines, restaurants, you name it, it was shuttered. Due to no fault of these organizations, rather by the edict of our government. It’s no mystery that when you shut down these things, people can’t earn money. So, in steps the government to provide assistance so people can continue to put food on their tables and clothes on their back. About 3 weeks into the shutdown, the first round of government assistance arrived…to the tune of around $2,000,000,000,000…that’s $2 trillion…or $2 million million. Lotsa money. Officially, it was known as the CARES Act.
Oh, and they weren’t done. By the end of Trump’s presidency, he signed into law the COVID Relief Bill in December of 2020 which equated to $1,000,000,000,000…that’s $1 trillion…or a million million.
By the time President Biden was sworn in, he had more assistance in mind. And in February of 2021, he signed into law the American Rescue Plan which equaled $1,900,000,000,000…that’s $1.9 trillion…or $1.9 million million.
And there’s this funny thing about man made structures…they often degrade…they get old. Much of the infrastructure (think highways, pipelines, bridges, utilities) was put into place in the 1960s – 1980s. And, well, it’s old. In need of repair. So in April of 2021, Biden proposed an infrastructure investment, called the American Jobs Plan, to the tune of $2,000,000,000,000…that’s $2 trillion…or $2 million million.
Question: Is that a lot of money? Given our definition of inflation, do you think we’ve satisfied the first part of the equation…too much money?
Too Few Goods
Funny thing about when the things I listed above are ‘shut down’…ummm…ya…there’s no workers to make things. The work from home orders allowed tech companies and a few other industries to continue their business and thrive. But manufacturing or other industries that require human labor? Not so much. Remember toilet paper? Over a year later, we’re still feeling the effects of the shut down of our labor force. Lumber prices are up 500%, not because trees became scarce (they are a renewable resource), but because mills were shuttered for months last year, which meant no workers to operate them. Now there is more demand than there is supply. Mill workers are getting back, but having a hard time making up for lost time.
I own a pool. Did you know there’s a chlorine shortage? Can’t find it anywhere. The line outside the pool store we go to was 45 minutes. Have you driven by a car lot lately? A local dealer in downtown Findlay looks deserted. There’s only a handful of cars on their lot compared to normal times. The reason? Semiconductor chips. These things are used in vehicles for power steering to entertainment systems. There’s no chips, which are supplied to car manufacturers, which translates into a shortage of new cars.
Question: Are there too few goods? Given our definition of inflation, do you think we’ve satisfied the last part of the equation…too few goods?
Inflation is synonymous with “loss of purchasing power”. What you could buy last year at $100 is now $104, for example. Onward an upward. And before you know it, you’ve lost so much purchasing power that you can’t afford normal items. It’s all quite scary, so what is an investor to do?
The answer is so simple, it’s confounding. Bottom line, an investor must invest in such a way, as to keep pace and dare I say, outpace, inflation. “Uh” I hear the reader exclaim, “Tony, that sounds great, thanks for nothing. What I really need to know is, can you please tell me how to keep pace with inflation?”
Glad you asked! Can you say…Stocks!
“Stocks!” you exclaim. “Too risky! Didn’t you see the Dow crashed a thousand points last week! How can you possibly tell me that stocks are the answer to inflation!”
Did you know the average retirement spans about 30 years for a married couple? (On average, at least one spouse will live that long after retirement) So, at the long-term historic inflation rate of 3%, it will cost upwards of $2.40 in the 30th year of retirement to by what $1 buys today. If your nest egg sits ‘protected’ from volatility by being invested in bonds, CDs, fixed annuities, and other things of that nature, it stands to reason that rising costs will overwhelm your portfolio at some point. So, the essential issue becomes creating an income that rises ahead of inflation.
Stocks have risen, over the long-term, by an average of 9% per year. Some years less, some years more. To average 9%, you have to have the stomach for those 1,000 point swings in the Dow. But doing so will allow you to keep pace, and if managed well…to outpace, inflation.
So, do we have inflation? Yes, I think we do. There’s a lot of money in the economy right now, and supply chains are still broken and/or still catching up with demand…hence, too few goods. It will settle out at some point.
But may the wise investor beware, inflation isn’t a right now issue. It’s a constant threat to the success of a retirement. The loss of purchasing power is destructive to a retiree. One of the best ways to combat this silent killer of a portfolio is to invest in stocks. They provide the necessary return to keep pace, and yes even outpace, inflation.