Transient Inflation – LOL

The government has expanded the money supply by over 35% since the Covid Pandemic began.  The printing press was being run 24/7 and the output was dropped out of helicopters on everyone, whether they needed it or not.  In addition, they forced huge sectors of the economy to shut down for months and even longer.  What we have is more money chasing fewer goods and services.  A recipe for inflation in any scenario.

To make things even worse, they impaired domestic energy production by cancelling the XL pipeline.  This has forced us to import more oil and gas at much higher rates.  And labor costs, were not spared.  People were paid more to sit home than return to work, minimum wages were raised significantly, and unions were given unprecedented preferences and privileges.

Anyone can see the runaway price spiral we have been enduring.  If you missed the 70’s or early 80’s, you have never seen this before.  The talking heads and government officials told us it was “transitory”.  Nobody is saying that anymore.  The Fed has still not mustered the courage to turn off the tap yet, and the Socialists would like to keep spending like it’s 1999. 

We are not in a good place.  As prices continue to increase, we risk a dangerous change in consumer behavior –Demand Pull Inflation.  Buy it now before prices go up, further increasing demand and fueling price increases.  Other problems await.  We have a tremendous national debt.  While interest rates have remained low for decades, they will rise; increasing the cost the government (i.e. taxpayers) must spend to service the debt.  It will force the government to cut spending in other areas or raise taxes – neither being good economically.                          

Wishing this to just go away is not likely to be an effective strategy.  A generation ago, after more than a decade of rampant and ever increasing inflation, Fed Chairman, Paul Volcker, drove interest rates into the stratosphere.  The result was a cure for the inflation, but the most severe recession we had endured since the Great Depression.  It may be the only cure for this round as well.

It is difficult to protect oneself financially from inflation.  In a period of sustained rising inflation the following strategies may be helpful.  Do not enter into contracts or agreements where you are being paid at a fixed price.  This could include employment/salary, property rental (landlord), and money lending (especially bonds).  Conversely, look to lock in long agreements on items you pay for.  Also, be wary of holdings or investments in areas that can be hurt by higher inflation or slowed economic activity.  Careful Financial Planning offers you the opportunity to mitigate and even profit from the new inflationary paradigm we are facing.

Hopefully, this does not end up the way it ended a generation ago.

The Bottom Line:  Inflation is real.

–Michael Ross, CFP®

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