Should we expect higher long-term inflation rates?

Should we expect higher long-term inflation rates?

by on Oct 14, 2021

In 1932, a man walks into an establishment to purchase his favorite adult beverages.  The owner says the cost will be $9.  The man said wow, last year the same beverages cost $10.  Are they on sale?  No, said the owner, "we as a country are in a deflationary time period which is when consumer and asset prices decrease over time, and purchasing power increases. Essentially, you can buy more goods or services tomorrow with the same amount of money you have today".

Ok, the owner probably did not say that.  What the owner may have said is lots of people have lost their jobs, those that have jobs do not spend their money, and we can't sell what we have.  In 1932 deflation was 10% or more accurately -10%.  

  • And for the record, the establishment would have been illegal as prohibition did not end until 1933. For obvious reasons, it is unlikely deflation affected the illegal adult beverage market, however, the inflation rate or CPI declined over 20% from 1930 thru 1932.  In other words, during that time period, $8,000 could buy the same goods and services at the beginning of 1933 as $10,000 did at the end of 1929.

Fast forward to the beginning of 1980 and a man goes into an establishment to buy adult beverages, now legal for decades.  The owner said the cost is $11.33.  Wow said the man, the same beverages cost $10 at the beginning of 1979.  The owner then said, "We as a country are experiencing a general increase in prices and fall in the purchasing value of money".  Ok, he probably did not say this.  He may have said prices are going up quickly as we have cannot keep products in stock and it is difficult getting more.  

In fact, in 1980 inflation was 13.33%.  From 1978 through 1982 the total inflation was 59% or 9.7% annually.  That means that an individual needed $15,900 at the end of 1982 to buy the same goods and services as $10,000 bought at the beginning of 1978.  The average annual inflation rate was about 6% from 1970 through 1989.  

In recent years, the inflation rate has been very low.  The average annual inflation rate from 2011 through 2021 was 1.7%.  Many have believed high inflation rates are a thing of the past.  As we have seen so far this year, that is not true. The question is higher inflation is a short event or a long-term trend? 

Also, if you want to put blame one political party or the other, I would suggest you blame both equally or in my estimation, both totally.  The inflation that is taking place now has been in the works for years.  A prime reason in my estimation is rather than pay as we go as a country, our policy the twenty years has been charging it and send the bill to our grandchildren.  As I pointed out recently, the federal deficit went from $5.7 Trillion in 2000 to $27.7 Trillion at the beginning of 2021.

Inflation can have positive and negative effects both personally and socially.

  • For example, homeowners who just bought their forever home with a 3% interest rate on their mortgage and have jobs in which their earnings keep pace or exceed the inflation rate will end paying their mortgages with cheaper dollars.  The same is true of the federal deficit.  Higher inflation rates enable the country to pay down on the federal deficit with cheaper dollars.  
  • On the other hand, workers who do not receive inflationary increases or retirees on fixed pensions lose money each year as their incomes do not keep up with the cost of living.

Though there are options and strategies for investing during inflationary time periods, inflation can be especially difficult for low-risk investors.  For example, an individual with $10,000 at the beginning of 1970 needed the $10,000 to grow to almost $34,000 by the beginning of 1990, or about 6% annually, to have the same purchasing power as $10,000 did in 1970.

What you should do?

  • Personally, this is a private conversation, but I would suggest all should put the possibility of ongoing higher inflation rates into their long-term financial planning.  
  • Socially.  We need to increase our federal revenues to combat years of excessive deficit spending.  If we do not, our grandchildren will be stuck with trillions of dollars of excess federal debt which they had no part in creating.   

I have no crystal ball and inflation is a complicated economic concern with lots of moving parts and the above is a very simplistic description.  But the consequences of higher than average inflation rates for both individual planning and economic growth can be substantial.  

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.