Column: Inflation is not always bad

Posted 7/20/22

If you were not an adult in the 1970s or even born yet, you might not have a clue what all this talk about inflation is. And even if you do remember clearly, this time is likely to be different. …

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Column: Inflation is not always bad

Posted

If you were not an adult in the 1970s or even born yet, you might not have a clue what all this talk about inflation is. And even if you do remember clearly, this time is likely to be different. Remember our new favorite word from COVID is “unprecedented.”

Most of us know that inflation is when prices go higher, but that is not always a bad thing for the economy. We want economic growth; therefore, prices will rise, along with profits and interest rates. These are not negatives unless things get out of hand. If you rely on your one economics class on supply and demand, this concept is relatively simple. However, the causes play into the effects and that is where the uncertainty lies.

Today consumers are concerned they are dipping into their discretionary spending to pay for necessities such as food, housing, and fuel. Investors are concerned their assets are not holding their true purchasing power if everything gets more expensive but investment cycles ebb and flow with the economy. Therefore, the denominator must be growth.

No one complains about high prices if they feel they are getting value for the money spent, or they have enough money to buy what they want without feeling a pinch. It’s when we don’t have the wage increases, or the stock market rising that we feel things cost too much. If the economy is on a growth tear and corporate earnings are soaring, then our investments should be going up as well. When prices increase without the underlying growth in your financial situation, then inflation feels personal. And it is …. personal.

We all have our own inflation rate. It is made up of what we like to buy, how much we earn, and how we handle periods of economic decline in light of our needs and wants.

According to Jay Weinstein, CFA ¹ most people would say inflation goes up when the economy gets too strong, or the government prints too much money. Except that was not the case in the 1970s. Nor was the opposite true between 1983 and 2007 when we had consistent economic growth and still managed two recessions and falling interest rates for 25 years.

The period from 2008 until now included the Great Recession followed by painfully slow economic growth, the Fed’s easy money policy, and now stagflation, inflation, market corrections, slowing economic growth and a potential recession.

Economists may deem the cause of rising rates to be the result of three main contributors: Pent-up demand from COVID; reduced supply of fuel and food due to the Russian invasion of Ukraine; and supply chain shortages due to China’s lockdown. None of these would have been caused by a normal economic cycle of recessionary traits such as high unemployment and negative economic growth. Those things may come but they would not be the cause, they would actually be the effect. So yes, I guess this is a legitimate use of the word “unprecedented.”

1. Financial Advisor Magazine Contributor

Patricia Kummer is a Certified Financial Planner professional and a managing director of Mariner Wealth Advisors.

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