So where is the inflation? A new debate is taking form in the annals of investing and economics, and while I am not an economist, I have been observing economics and the financial markets for my entire career. So much of what I am writing here will be anecdotal in nature, and a trained economist would probably say some of what I’m saying is wrong, but then again, every academic economist I know struggles with “rightness” from time to time as well.
Last week Fed Chairman Janet Yellen said during her press conference following the Fed Board’s meeting the lack of inflation at this point in our economic recovery was a “mystery.” This of course is true. With headline unemployment near historical lows, the stock market near all-time highs and my observation of the local housing market showing very little price softness left, the next logical expectation would be broad based price increases throughout the economy.
Instead, the government’s primary indicators of inflation, the CPI and the PPI, have hovered in the 2 percent range, which is below the Fed’s desired target zone. The US dollar, which functions as a counterbalance to inflation, remains relatively solid (a strong dollar is disinflationary). And interest rates, which serve as a kind of indicator of future expectations of inflation, remain stubbornly low.
Anecdotally, with the “Amazon effect” much of what my family buys on a regular basis is less expensive. Low gas prices have become almost like an entitlement in my mind. Prices for major products like cars and TVs seem to have been stable for a decade and I don’t buy blue jeans all that often, but I did pick up a pair last weekend and I really believe they cost less than the last pair I bought a few years ago.
Granted, there are pockets of things which cost more. Fine dining, some travel, certainly healthcare has all gotten more expensive. Except for healthcare, the higher prices seem to be in the realm of “experiences,” which quite frankly I can just skip if they get to costly. And as far as healthcare goes, the industry has been so mucked up by the government that it’s not useful from an observational economic perspective.
So, what does all this mean for Americans as consumers and investors? Well my belief is the world is feeling the effects of there being simply too much of everything. This theory has been referred to as the “Age of Oversupply,” which postulates advances in technology, global supply chains and production capacities in emerging economies in Asia and Latin America have created such powerful global competitive forces, it is nearly impossible for business to increase prices for both goods and services.
From a financial planning perspective, I think a different approach toward inflation planning may be warranted going forward. Instead of planning for broad-based price increases over time, perhaps identifying potential targeted inflation risks within spending habits and lifestyle needs and planning toward these risks may be more effective. For example, travel budgets may be increased over time, but budgeted amounts for energy and utility costs are not.
From an investing point of view, investors may just have to finally accept a stubborn longer term lower interest rate environment. By accepting this paradigm, it may be possible to manage risk in more targeted ways. Accepting risk in some parts of a portfolio while focusing on true capital preservation in other parts.