Inflationary pressures are building, and fears of sudden inflation have caused some investors to sell their growth stocks. How does this impact you and should it be a concern?
Inflation erodes purchasing power over time. It makes money worth less as goods and services become more expensive. Over time the prices of all items we buy will rise, but the speed and/or magnitude of the rise is what is driving the markets to react in this moment. Inflation of 2%-3% per year has been the historical norm for the past 70 years. The fear of hyper-inflation is today’s “crisis of the moment”.
You’ve likely heard us use that phrase in the past (and you will again in the future) as the financial media will always find a “crisis” that they promote as something you should be concerned about. If it’s not fear over election results, its FOMO about cryptocurrency (fear of missing out), or it’s gas shortages caused by a gas line shutdown and accentuated by people panicking and topping-off their tanks (a la toilet paper hording last March). These are all moments in time… they are temporary. Given a chance, each news event can cause fear. Instead, we encourage you to focus on your plans and the long term nature of investing; not today or tomorrow.
Back to basics. Supply & Demand are real economic forces, and there are several areas of our economy that are currently out of balance because of the Covid economy. We are all experiencing them in this moment. Whether it’s the increased cost of materials, supply disruptions, increased demand or unfilled job openings. We suggest the current price increases are part of the normal shifts in the business cycle, while businesses are adjusting to a post-pandemic economy:
- Timber prices for home projects, housing prices, and car prices have been rising for months (and most recently gas prices as we all know).
- Supply disruptions are negatively impacting the reopening of the economy in many regions of the world. Some are supply chain related (microchips) while others are due to freak accidents (remember the cargo ship that blocked the Suez Canal for a week).
- Demand has increased too. Did you receive another stimulus check? That creates an immediate increase in demand for goods and services (intentionally).
- And wages employers have to pay are on the rise as companies are struggling to get people back to work at pre-covid wages because they are receiving supplemental federal unemployment benefits that are temporarily in place until September.
These and several other forces are causing ripples in our economy, but the question remains, will these supply & demand imbalances simply work themselves out over the next few months or are they leading to something more permanent… more long term? That is the reason the stock market is adjusting prices. The supply & demand on some stocks (more sellers than buyers) is causing stock prices to decline. This may continue to cause short term volatility in the markets.
Healthy price inflation is good for the economy. The Federal Reserve inflation target is set at 2% and the actual average was 1.7% the past 10 years. But inflation increased at a faster pace than expected in March (0.6%) and April (0.8%) according to the U.S. Bureau of Labor Statistics. This brought the year-over-year inflation rate up to 4.2%.
With time its expected that the ripples will smooth out, just as they do on a pond. But if things don’t look right, the Federal Reserve, who monitors the data month-to-month, is ultimately prepared to act as needed by raising interest rates and/or implementing other measures at their disposal.
In the meantime, we ask you to be aware of what is going on, to ask us questions as you want, but to also know this may likely just be the “crisis of the moment”. Try to avoid the headlines if you can, especially if you know yourself well enough that it will cause concern. Remember, there are some news people who are paid big-bucks to run frequent 24-hour news stories and internet headlines to catch your attention (through fear). They need your eyes on their content so they can sell advertisements.
Inflation is normally at low levels. Yes, there is a chance Inflation may rise even more in the near term, but the belief is that it will be temporary as the economy continues to reopen and the various supply & demand imbalances settle down for a post-pandemic economy.
Questions to consider. Has your situation changed? Are your goals different from our last meeting? Do you want to review your plan before your next meeting with us? If yes – please contact us to discuss your personal circumstances. We are here to help.
And if you aren’t a client of Odyssey, but you have questions or concerns about your situation, goals or plans – please contact us. We are here to help.