How worried are you about inflation?

[Scuba]

The above numbers are bad, but I am going to check them against their pre-Covid values.



Many commodities went down because of lack of demand, and their recovery may make the price increase looks bad.

I agree, some of this is demand booming after falling steeply during COVID. However that is not the case for food. That seems more driven by labor costs and supply chain disruptions. I am not worried that these kind of increases will continue, but I do think inflation is increasing. I don’t feel I can quote a number either because I’m not aware of what is included vs excluded when the Fed or the media quotes inflation rates. All I know is our personal rate of inflation has far exceeded CPI since retirement, but luckily so has our portfolio growth.

 

[Scuba]

https://www.cnn.com/2021/03/14/investing/janet-yellen-inflation/index.html

I recall it was widely reported that groceries and housing prices both accelerated dramatically during COVID. That was certainly our experience. Healthcare also went up for us, perhaps a lower double digit increase, but still a double digit increase.

 

[Hacksaw]

Exactly. Chronic inflation, the kind the Fed policy makers fear, isn't consumer price change, it’s when across the economy prices rise for everything, including wages / labor, so there’s no real gain. Once wage and price increases begin feeding into each other inflation becomes chronic and is very difficult to stop without a major contraction or Fed reset a la Volker ‘79.

If producer and consumer prices rise but wages don’t, a recession is almost inevitable, as purchasing power has fallen.

If the current surge in some prices holds indefinitely, we will have either a serious inflation problem and/or a collapse in demand. The Fed view is these price jumps, especially in commodities like lumber, will fade quickly once supply kicks in. Greenspan described those price increases as “once offs”, meaning they did not contribute to sustained inflation.

Exactly. All of the anectdotal "price increase horror stories" do not constitute inflation from an economists point of view (coming from an actual economist). All of the "sky is falling" reports are nonsense IMHO. Inflation is a sustained increase in prices across the economy over a long period of time (3-5 years). If your asset allocation philosophy didn't account for 3-5% inflation for 10+ years, then you shouldn't be retired.

Now if hyperinflation hits (50%+ increase in prices per annum for 3-5 years), then that's a different ballgame. Anything other than that is just a serious failure to plan for normal events.

Hacksaw

 

[Letj]

I suspect there are several countervailing forces that will work to hold down inflation.

1. The national eviction moratorium will end, either in June as currently scheduled or perhaps sooner if Judge Freidrich's decision yesterday is not stayed. Once people have to pay rent, they will no longer have funds to drive up the price of other things.

2. COVIS stimulus will end and enhanced unemployment benefits will end, which means people will need to return to work. That should help on the supply end.

3. Raw material shortages and supply chain disruptions caused by COVID will work themselves out as restrictions are lifted.

4. While there may be some pent up demand for a bit, a lot of people have discovered new ways of living in COVID that simply involve buying fewer things. For example, I don't expect to spend as much on restaurant dining as we did before COVID. I'm sure others have discovered there are many spending items that they previously took for granted but have discovered they can easily forgo.

5. There also will be structural changes to the world of work. People have discovered the joys of working from home, and companies may have discovered financial benefits from encouraging that. Since probably 2010 we haven't really needed to travel across country to have in-person work meetings (with all the associated spending), but it took a pandemic to break old habits. When I was with the big law firm in NYC, the two biggest cost drivers were associate salaries and rent. If you can minimize the amount of Class A office space you need in midtown Manhattan, you can greatly cut costs. Also, if associates don't have to commute into the City, you may be able to pay them less. Hence, lower spending on clothing, lunch at a restaurant, hotels, transportation, etc. And maybe lower legal costs (or, cynically, richer partners)



I could be wrong about all of this, but it is something to consider.

What happens to all the office space? How will that factor into inflation? Will they be converted into residential space? In the meantime how will the mortgages on these be paid if they’re left empty and fall into disrepair and what impact will that have on the real estate market?

 

[RetireeRobert]

How worried am I about inflation?

Worried, as I already know home prices have skyrocketed, gas is up sharply, used car prices are up steeply, building materials are way up, healthcare costs are up (just visited dentist!). So, as to the original question, yes I am worried.

 

[GenXguy]

I saw this informative guide on inflation posted in another forum. It includes some nice charts, such as showing how common costs far exceed the government CPI figures.

https://www.lynalden.com/inflation/

 

[Gumby]

What happens to all the office space? How will that factor into inflation? Will they be converted into residential space? In the meantime how will the mortgages on these be paid if they’re left empty and fall into disrepair and what impact will that have on the real estate market?

I would expect rents to decrease in response to lower demand. It may not be immediate, because those leases typically have very long terms, but I'm sure it will happen eventually. Banks may get stuck with non-performing mortgage loans, which they probably will restructure. I would think that would be deflationary as well.

 

[RobbieB]

Not worried about inflation. Have lots of equities as compared to bonds and lots of dividends.

 

[Markola]

I like the inflation of my home value, approximately 8-10% last year and the same predicted again for this year. And that growth is on the whole home value, not just the half I have in equity. Leverage, Baby.

 

[RAE]

Now if hyperinflation hits (50%+ increase in prices per annum for 3-5 years), then that's a different ballgame. Anything other than that is just a serious failure to plan for normal events.
Hacksaw

Sounds about right to me. For the things that we purchase most often (groceries, gas, utilities), I personally have not noticed much of an increase so far. I know that lumber, steel, etc are way up, but that has not impacted us (at least not yet), so I'm not going to lose any sleep worrying about it. With regard to groceries (food), I have a certain amount of flexibility in what I buy (as we all do), and I shop for items on sale as well, so my grocery budget has not gone up much in the last year or so, if at all. And I don't feel like I have reduced the quality of my diet at all.



I don't disagree that serious inflation that lasts for a while can really hurt people, especially younger people that are still working. It remains to be seen how long this blip of inflation will last, and since I have been retired for a while now (and have planned for some inflation), I just can't get too concerned about it at this point - it's way down on my list of items to worry about.

 

[audreyh1]

It seems like all my adult investing life investors have been worried about inflation. Especially after 1999 when I retired and it kept dropping, everyone expected it to pop back up. And after 2008 when deflation was experienced around the world, many thought much higher inflation was right around the corner.

I'm not saying it can't pop back up. I'm just saying that I have heard these concerns and all these reasons that much higher inflation is imminent for a very long time now. Inflation is dependent on many factors, and the global economic situation is a big one.

ECRI reports that 10 year inflation expectations have risen to about 2.5% and that is the highest it's been in 8 years. note: 2.5% - that seems rather "normal".
https://www.businesscycle.com/#

 

[kgtest]

The above numbers are bad, but I am going to check them against their pre-Covid values.

Many commodities went down because of lack of demand, and their recovery may make the price increase looks bad.

THIS! The deals are tougher to be found, and in less traditional avenues. Check the price of car rentals...eeek! Talk about making up for some lost mileage... they are all gouging to cover lost pandemonium dough

 

[Scuba]

I saw this informative guide on inflation posted in another forum. It includes some nice charts, such as showing how common costs far exceed the government CPI figures.

https://www.lynalden.com/inflation/

This is an excellent article. Long, but explains a lot of concepts really well and makes a good case that inflation is likely to be somewhat higher in the next decade, while hyperinflation is not likely.

 

[Surewhitey]

I've enjoyed the many thoughts on this.

DW just mentioned inflation the other day. I know it is happening to so many people and items. Us personally...

I just told her that we spend $700/mo on average for food, so expect to see a $70 increase for this. Insurance costs may increase $50-100 (we can modify the coverage if needed). Those are the bulk of expenses for us. Consumers are going to be paying the bulk of this IMO.

Capital preservation, inflation adjusted, is my only concern. But right now, not very worried.

Side note, DW works for a very large commercial lines insurance company and they just had a discussion on inflation (upper-crust meeting) and are forecasting 10-15% in the near-term. Quite pessimistic, but planning on it...

 

[Clover5]

Not worried. I am in this for the long haul, am 75/25 and have more than enough cash to weather years of turbulence. I learned from 2000, 2008 and 2020 that staying in the market, like I did, was way more fruitful than screwing with my long term plan. All our friends who kept bailing always regretted it as the markets moved forward.

 

[24601NoMore]

Haven't seen too many people comment on what significantly rising inflation will do to portfolios that are heavy (50-100%) stocks.

Inflation will typically hit stocks pretty hard. In fact, we're already seeing that yesterday and today with many analysts commenting that the selloffs are due largely to inflationary fears.

 

[sengsational]

The Schwab article, posted a few pages back, had S&P 500 doing well (in the top 3) in low, medium and high inflation. I commented on that earlier. If we have "stagflation", that's usually bad for stocks. But I think we're in for another "roaring twenties". It may include inflation, but if the economy is doing well, I'm not too concerned about moderate inflation on a stock-heavy portfolio.

 

[MichaelB]

I saw this informative guide on inflation posted in another forum. It includes some nice charts, such as showing how common costs far exceed the government CPI figures.

https://www.lynalden.com/inflation/

Her conclusion is real inflation has been higher for 3 decades by about 0.5% per year. The math of that claim means that the US GDP in 2020 of $21T was overstated by $3.2T in real terms and over $20T cumulative over the past decade. How can that much real economic activity simply not exist without affecting employment, profits, labor productivity, international trade? (Rhetorical question). This would require a huge decline in standard of living over that period, to which there is no evidence.

This is the logical failure common in these inflation skeptic models. John Williams Shadow Stats is the most well known, and he has acknowledged the conclusions don’t hold up when applied to real life.

Beware people selling newsletters and investment products and services.

Think of it like this. CPI says that price inflation averaged about 2.5% per year for the past three decades. Factoring out some questionable parts of the model, a number of around 3% seems more realistic.

 

[Montecfo]

Not worried about inflation. Have lots of equities as compared to bonds and lots of dividends.

Higher interest rates depress prices of both.

I am also not worried, but with different reasoning.

 

[gcgang]

What does Dr. Copper have to say about inflation?

https://www.macrotrends.net/1476/copper-prices-historical-chart-data

Above link to 45 year chart.

My observations: copper has broken out to a new all time high; copper dropped during every economic downturn, except the COVID induced one.

Wish I’d have doubled up on my FCX when it was a hat size a year or so ago. Hit $42 today.

My core belief is that when you increase the supply of something, it’s price/ value goes down. Value of the dollar ( most other fiat currencies?) would seem likely to decline with the recent fiscal and central bank policies.

Go Dogecoin? Lol.

 

[SecondCor521]

But what can we do about it, though? I'm not being snarky, I'm genuinely asking. Let's say we're looking at a period of elevated inflation. What do we actually do about that, as individuals?

As others have said, assess, plan, and prepare ahead of time.

Assess your expenditures and see how exposed to various categories of inflation you might be. Plan and prepare by considering substitutionary goods if such exist, or ways to just not buy whatever it is (again, if possible). Position your portfolio as you see fit.

Or one can also try to avoid it. Get involved in the governmental processes that might drive inflation, such as working to reduce your property tax burden, writing your representatives, running for election, and voting. Consider moving somewhere with lower inflation. (Where? I dunno. Places in recession tend to have low inflation, so maybe somewhere in Europe?)

THIS! The deals are tougher to be found, and in less traditional avenues. Check the price of car rentals...eeek! Talk about making up for some lost mileage... they are all gouging to cover lost pandemonium dough

I've heard that the rental car companies reduced their fleet sizes in response to the lack of travel during the pandemic. Now that pent up travel demand is reemerging, the car companies must raise prices to ration their limited supply against an onslaught of demand.

I'm not sure why car companies did that rather than just park a bunch of their fleet as the airlines did. Probably were in worse financial straights than the airlines and/or it's easier to sell a Dodge minivan than a slightly used 757.

Side note, DW works for a very large commercial lines insurance company and they just had a discussion on inflation (upper-crust meeting) and are forecasting 10-15% in the near-term. Quite pessimistic, but planning on it...

Are they planning to raise their pricing by 10-15%, or are they expecting their costs to rise by 10-15% (or both)?

Haven't seen too many people comment on what significantly rising inflation will do to portfolios that are heavy (50-100%) stocks.

Inflation will typically hit stocks pretty hard. In fact, we're already seeing that yesterday and today with many analysts commenting that the selloffs are due largely to inflationary fears.

Stocks and leveraged real estate seem to be the only real plays to beat inflation over the long run. Gold/PMs, commodities, unleveraged real estate, and bonds all seem to be around +1% over inflation over the long run (decades, not days).

GLD is a bit down over the past two days, which doesn't really match the analysts' explanations. I suspect the drop is due to other things - perhaps a bit of a minor tech bubble bursting causing a bit of fear.

 

[Jerry1]

GLD is a bit down over the past two days, which doesn't really match the analysts' explanations. I suspect the drop is due to other things - perhaps a bit of a minor tech bubble bursting causing a bit of fear.

This is one of my concerns. It’s perplexing that gold isn’t going through the roof. I have a friend who is a gold bug and he’s so convinced that there’s too much money in the system that he’s going 25% gold. Not sure what he’s worth, but I’m sure he’s talking about something like 3/4 million in gold. But in the past year, gold has decreased, though the last six months its been rebounding. Still, it seems like it should be soaring and it’s not really doing that. If it’s the inflation hedge and inflation is real, shouldn’t gold have already taken off?

 

[SonofCohoes]

Try buying plywood or a new car right now if you enjoy sticker shock...

We just got a great deal on a new car. They wanted our car on the lot. It was a 19 with low miles, they’re asking 2000 less than we paid for the new one. Used cars are at premiums never seen.

Now if there’s fuel to put in it, well, that’s a different story.

 

[eytonxav]

I guess it depends on how much inflation. The stock market can do pretty well even under moderate inflation. The scary thing is the fed does not have a lot of arrows left in its quiver to deal with a large spike in inflation, and that scares me more than the inflation itself.

 

[RobLJ]

DW tells me that I'm a bit of a curmudgeon.
But, man, could we have used all you inflationistas in the war against deflation for, oh, the last 30 years or so.

Again, I'll believe it when I see it.

It is amusing to see the deficit scolds re-emerge after four years of slumber. I myself was terrified of inflation in 2009, so I'm making fun of myself and I'm a very big target, so shoot away!