With employment slowly rebounding and the 10-year treasury creeping higher, I wanted to focus this quarterly note on Inflation. I’ll start by giving a brief overview and history of inflation. Then I’ll wrap up with what we think it means for your portfolios. Hope you enjoy.
For starters, the basic definition of inflation is- “The rising of prices for goods and services in an economy.” I’m sure you are seeing this across your everyday lives at local supermarkets, gas stations, restaurants, hardware stores, etc...
As it stands today, Inflation currently sits around 5.4%. The long-term average runs at about 3.24%. For nearly the past decade we’ve seen historically low inflation as it’s hung around 2% or lower. This elevated percentage that you see in the news, denotes year over year change. Simplistically meaning, if inflation sits at 5.5% today, current prices are 5.5% higher than they were a year ago. This makes perfect sense since many of our economies sectors were completely shut down throughout the majority of last year.
From a historical perspective, inflation has fluctuated over time (see figure below). You typically see larger spikes during times of war, and when the economy overheats due to long periods economic prosperity. Overall, through these ups and downs, like the stock market, the long-term trend for inflation is upwards. The best way to see the true impact of inflation over time is to compare the cost of a stamp in 1950 vs. 2021. A stamp in 1950 cost 3 cents… That same stamp today costs 55 cents… Nearly 20 times higher. Averaging roughly a 4.2% price increase per year for that 71-year period. This annualized loss of purchasing power is another reason why long-term investing in the stock market is so important. Keeping your money stashed under your mattress is not a great inflation hedge
Depicts Inflation back to 1915. Source- WSJ “When Americans Took to the Streets Over Inflation”
What does this mean for you and your portfolio? And is Inflation here to last?
As I mentioned earlier, inflation currently stands at around 5.4%. In the interment period we do believe prices will continue to trend upwards as many businesses and economies approach full capacity for the first time in nearly 2 years. However, we, as well as our CIO at Commonwealth Brad Macmillan, do believe this will be temporary. You are already starting to see the year over year inflation number trend down as you get a more accurate comparison. Here is what Brad wrote in his most recent article on inflation-
Could inflation rise further? Of course. Will it rise? Maybe, for a while. But, ultimately, it will likely rise only a bit more quickly over time than it has over the past several years, once the economy normalizes again. Do we need to pay attention? Yes, which is what we are doing right now. But do we need to make significant changes to what we are doing? No—not yet
From here, like Brad, we remain vigilant and balanced in our portfolios with a slight underweight in equity.
As always, we are happy to sit down and discuss your plan and your portfolio.