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Mind on Money: Real-world inflation could lead to even bigger problems

Mind on Money: Real-world inflation could lead to even bigger problems

Tracy, my wife, said she wanted to leave early for 5:30 mass, she wanted to go to the furniture store because she was thinking about getting some new chairs. She knew this meant pulling me away from piddling in the barn early, so she asked if I wanted to just meet her at church.

I knew what space she was talking about for the chairs, and I had opinions, so I thought I better get cleaned up and go with her. I had not been to a furniture store in at least five years.

The furniture was beautiful, and I was quickly attracted to a nice leather arm chair. I sat down, it was very comfy, I could imagine myself watching football in it with buddies. The price tag was hanging off the back, so I got up and walked around to take a look, I about passed out.

I exclaimed to Tracy, “How can this chair cost so much money? Is this really what they are charging or is this some kind of pre-sale price to make you think you’re getting a deal with the 'real' price?” I waved to a sales person. “Hi, is this chair on sale?” I asked. He pulled a little sheet of paper out of his pocket, “No sir, that chair is not on sale”. Well, pretty or not, I’m not spending that kind of money on chairs, I thought. I sadly moved on to look at other chairs, but they all cost about the same, I was no longer in the mood for chair shopping.

I’m calling this real-world inflation, and it is here. In my practice we talk about inflation all the time, but it's more of the theoretical type of inflation. Yes, income needs inflate over time. Yes, we have to plan for inflationary trends, so we “bake” assumptions into our financial models, and we planners have a good understanding of how predictably rising prices could impact our clients over time.

Here’s the rub, however. I’ve been helping clients with planning and investing for 28 years now, I’ve experienced higher energy prices from time to time, I’ve experienced food prices going up here and there, but in truth a lot of things have actually gotten cheaper during my adult life. Computers and TVs certainly have, and I would argue even though vehicle prices have gone up, prices have risen less than the technology and quality of vehicles have improved. The Amazon effect has enabled us to much more easily shop for prices online, and as a result there’s a lot of China-sourced consumer items available for really good prices. So, inflation as a theory has not always been borne out by my real-world experience.

Which brings me to inflation as a theory. Famed economist Milton Freidman once said “inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” This cryptic statement lies at the foundation of all academic macroeconomic discussion regarding the topic. In basic form it really means, inflation is always the fault of the government.

Over the past four decades the government, which for this conversation we will include both the Federal Reserve and the Federal government, has certainly made plenty of epic policy blunders involving macroeconomics. Deficit spending, meddling with the banking system, mistakes with interest rate policy, all can be inflationary in nature. While the policy makers were making their inherently inflationary mistakes, however, the private economy was experiencing the trends of globalization, making labor cheaper, and technology advancement, making everything more efficient, and so in my opinion the government kind of “got away with it” in that prevailing improvements in the supply and delivery of goods and services were able to “paper over” the inflationary trend created by fiscal and monetary mismanagement.

It’s possible that it’s time to pay the piper. COVID in 2020 was a crisis like no other in modern civilization. It’s possible the economic policy response from the government may have prevented a depression, but it was never going to be without a price. Perhaps if COVID-disrupted supply chains come back on line and government policies best described as economic triage get scaled back, the extreme rise in prices for things like real estate, vehicles, food, gas and yes, chairs, we are experiencing in America will prove temporary, but this is a big “if.”

What concerns me now is, because of the prices, I walked out of the furniture store without any chairs, and I don’t think I’m going back. If this happens in enough households across America, while the government is still busy making policy blunders, we could have a real mess on our hands, a mess called stagflation, which we do not want to explore.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at Securities offered through LPL Financial, member FINRA/SIPC.


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