Stephen: Hello, everyone, and welcome to another episode of the Smart Money Show. I’m your host, Stephen Rischall, along with my co-host, Matt Stadelman.

Today we’re going to be talking about something you’ve probably seen in the headlines.

Inflation, it’s been rising. Is it rising too fast? Is it something we should be concerned about? We’re going to dive right into this and more.

Welcome back. That’s the big question, is inflation something that we should be concerned about? It’s right around the corner here, it’s happening. Matt, what do you think is going on with inflation right now?

Matt: Well, definitely it’s back in the headlines and it’s true that prices for many things have gone up. Certainly prices of homes, gas, lumber, dining out, all have gone up dramatically recently.

The question really is, does this mean that inflation is out of control?

Well, let’s talk about some facts. According to the U.S. Bureau of Labor Statistics, the consumer price index from March of 2020 to March, 2021, so that’s a rolling 12 months, was up 2.6%. For the 12 months between May, 2020 to May, 2021, that number was 4.9%. So there’s clearly a jump.

In fact, in May alone this year prices went up 0.6%. Now, if you annualize that rate, that’s over 7%. So to me, that looks like inflation is getting stronger. And if you compare, or if you look at 2020 compared to the previous four or five years, there’s no question about it.

Currently, as of this May, inflation is projected to be 5% for 2021. Now, that’s the strongest it’s been in 13 years, but the numbers for 2021 so far, don’t tell the whole story.

Much of this inflation is a result of the economy opening back up after the pandemic, and it’s also due to supply shortages. The case in point is, a big chunk of the inflation this year has been caused by rental car and used car prices rising. Now, there’s a couple of reasons why this is happening but there have been critical shortages of supplies for cars, and because people have also shifted away from public transportation, creating more demand for people to buy and rent cars instead. But once manufacturing gets back on track and gets back to normal, these prices should moderate.

Stephen: That seems reasonable. The other thing too, is housing, both rentals and purchases. People are moving and potentially changing their situations, even permanently based on this work from home environment. So that’s been changing too along with other prices that have been going up.

Matt: That’s definitely post pandemic pent up demand for housing, both purchases and rentals. The other thing that’s noticeably more expensive is dining out. I think this is more attributed to a shortage of people willing to work right now, largely because there’s still unemployment benefits that are still running as part of the recovery. And until those unemployment benefits run their course, for some people the math doesn’t add up and they’re not going back to work yet.

That’s, what’s happening, dining is becoming more inflated because of that. But once those benefits run out, the worker shortage should normalize and then any rise in costs for going out to eat should also sort of level off as well.

Stephen: Right, so if you notice, these forces that seem to be pushing inflation up right now, they seem to be more like temporary imbalances. The Fed, they call that transitory. We’ve come out of this recovery, or we’re in this recovery, and these things are probably going to be shorter term rather than longer term.

The Fed doesn’t really think it’s a big problem right now. We don’t think it’s something to be too concerned about either. But the problem is over time, inflation, higher inflation, really can lead to higher costs. That’s for us personally and for businesses. This can lead to lower profits, lower profits usually mean lower stock prices, and all these things are connected.

When the cost of living rises faster than our incomes, the standard of living goes down. And this can really be an issue for retirees that have only so much of a fixed income that they’re working off of.

Matt: Going back really quick though, you said like the Fed is thinking it’s largely transitory but you know, they might not feel like the inflation is a real problem yet ‘cause in fact, they want inflation to rise, because if inflation rises, interest rates will rise accordingly as well. That’s kind of what the Fed wants to do. They’ve been in a suppressive mood related to interest rates on borrowing and others, and that was a way to keep inflation in check. Now they’re telling us that it’s important for us to accept a little bit higher than what they have been in the way of an inflation. So they’re telling us that they plan to do these things but when you couple that with the government spending that’s on the table right now in Washington, you know, sooner than later, inflation could be broader and more durable of a challenge. But to be fair, moderate inflation, if they can keep it in check, can be good. It can stimulate job growth, the stock market is often done quite well during inflationary periods and it’s considered a pretty good hedge for inflation for investors.

Stephen: We should be looking at what’s really happen when you zoom out on the chart. We’re going to look at over the last 25 years and what you see is, over that period of time, just like Matt said, so inflation has done right around 2%, which is the Fed’s target, so 2.2% over the last 25 years, the S&P 500, so that’s large U.S. companies, that’s done about 9.6% and then home prices, so national residential home prices up about 4.4% over the past 25 years. So clearly you kind of see there’s that relationship between as inflation of the cost of goods go up, so do asset prices. So more or less it means really important that we need to be having our money work for us and hopefully appreciating along with all these asset values and everything else.

Matt: Yeah. And it’s good to see the last 25 years on paper like that and kind of compare and contrast those data points. You know, and over the long haul, the stock market has been a great way to beat inflation, but there’ve been difficult periods too. I mean, if you take, you know, period of time between 1970 and 1980 plus or minus, this was a period where inflation increased faster than the stock market and this hurt investors, especially retirees as they’re, you know, their savings were devaluing at that time. If you look at what was happening during that period of time, the stock market here represented as the SMP, annualized return of 3.5% versus an inflation rate for that same period of time of just over six and a half percent. And that really speaks to the troubles that people were facing during that time, there were shortages of variety of things, there were gas rationing and, you know, I was a teenager during that period of time and, you know, remember hearing my parents talking about 12% interest rates for their mortgage, you know, that’s something that we’re all gasping at the thought of these years, but there are people listening to us today who remember that vividly ‘cause they were the ones getting those mortgages. So these kinds of things can happen. Will it happen? We don’t know, but we are in a period right now where there’s been more accommodation in terms of Fed policy and trying to normalize or regulate inflation and interest rates.

Stephen: That’s all very true. And if we look at a more current event, so if we look about 10 years ago, coming out of the Great Recession and the real estate bubble and mortgage crisis, in fact, a lot of those headlines you might remember were kind of similar, right? We had this ballooning federal debt that was increasing, the deficit, we also had a lot of government stimulus and support, we had low interest rate environment, so literally a lot of the headlines were the same. People were concerned about inflation or hyperinflation but what actually happened over those past 10 years is well inflation was a bit higher. So instead of that 2% long-term average, it’s more like 3.4%. The S&P meanwhile returned double digit, 14%, and home prices went up by more than 5%. Once again, we see that relationship that, as inflation ticks up, as interest rates tick up, other asset prices tend to follow over the long-term trend. And again, and really important lesson to be learned here. If we have money just, you know, too much money in a sense, sitting in a bank account, not earning anything, we’re losing that purchasing power over the longterm to inflation. So we’ve got to do something. Unfortunately, there can be periods like the 70s to the 80s where even the stock market couldn’t keep up with inflation. But certainly in that case, your bank account’s not gonna keep up with inflation either.

Matt: I think one of the takeaways I’m bringing up here what I want people to understand is that we have to take a long-term view because short term we know that things can get bad in that short term, but they tend to be, they do trend to be transitory. They do tend to level themselves out so when it’s seemingly bad, and maybe we’re in a period of that right now, maybe we’re not but things tend to level out and you have to endure those painful periods. We try to mitigate those risks by diversifying your portfolio and having the right mix of, you know, those growth assets and the not growth assets or the fixed income stocks and bonds, but we can’t completely insulate you from risk. It’s something that the tools that we can bring to the table, but at the end of the day, we have to be mindful and make sure that that risk is set according to you personally.

Stephen: bottom line, some amount of inflation is probably a good thing but too much too quickly, that’s not so good. The Fed, they’re having their meeting right here today and over the next couple of days here, we don’t really expect them to announce any kind of a hiked interest rates, at least not yet. We do think that it’s likely that later they’re gonna announce that they’re gonna start thinking of increasing rates, but besides the short-term forces, inflation could heat up over the next several years. That’s what we got to keep an eye on. And depending on the severity of this inflation and how long it lasts for, it really could have big implications for your financial plan and your retirement plan. So if it’s been a while since you’ve checked in and updated your financial plan, now’s a really good time to consider it. A serious implications for business owners and folks considering selling a business anytime soon, if now you’ve got to contend with inflation as well. So good time to check in. And that’s why I really encourage you to set up a time to meet with us whether at the office or over the phone or on Zoom. So, hey, if you learn something new in this episode be sure to give it a like, share it with your friends, your family, your loved ones, because they probably have a lot of the same questions that you do and are reading a lot of the same stories that you are about inflation. If that is something they should or shouldn’t really be that concerned about. Until next time, I’m Stephen Rischall, that’s my co-host Matt Stadelman, and thanks for tuning into the Smart Money Show.