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Weather Report: Inflation Part 2

Weather Report: Inflation Part 2

| January 12, 2022

Inflation: Media’s Favorite Fear Factor 

Welcome to the “New” Year, where we continue to talk about old issues. One of the most popular ole’ problems? Inflation.

Inflation has been ringing in our ears for years now, but the tune seems to be getting louder by the day. Why? It’s not because inflation is becoming anymore intimidating. It’s because of something slightly rowdier - the media. 

The media generates mayhem; that’s its job. And what better way to generate mayhem than to convince people that their money means less and less by the day? For generations, financial journalism has been the culprit, convincing people that they have something to fear. And lately, inflation has been its favorite fear factor.

 I will say this; inflation will rise. But that’s not the end of the story. What goes up must come down, and inflation is no exception. Things get worse before they get better, but they do get better. This can be said for any crisis. The mayhem starts, and it ends. Investors who have a patient, disciplined, and goal-focused advisor should not be overly worried about that cycle. 

The media will talk a lot about what makes inflation go up. They will fill our minds with how, why, and what created the “doom” that we are all set on discussing. But who talks about how, why, and what makes inflation go down? Me. It’s me against the media. I could have picked a much easier battle, but that’s not as fun. Let’s dive in. 

A few things must and will happen to dilute the current inflation spike we are experiencing. 

  • Supply/Demand Rebalance

If prices increase, demand will decrease. Christmas just passed, so this is a principle I’m sure we all recently experienced.  We want to spoil our loved ones with a tree full of presents, but once we see those price tags, the number of presents starts decreasing. 

  • Innovation

Innovation has been the partial cure for inflation for at least four decades - or more. Our busy brains are always working on new ways to water the consumer garden. Once we pump out more attractive toys, tools, and technology, jobs start increasing, and money starts regulating. 

  • Monetary Policy 

It may take a while, but monetary policy will reverse course - eventually. We have been dealing with the economy for a while now, and since our stints in the ’70s, we have a good grasp of what to do in times of extreme inflation. For example, when an economies money supply gets a little too massive, the government will try to counteract these effects with a contractionary monetary policy. Reversing into a contractionary policy will often result in things like decreasing bond prices and increasing interest rates; reducing the money supply altogether. Since there is less money to go around, those who have money will save it - not spend it. And inflation will inch backwards into a more bearable market.

The means to the end might seem a little scary, but it will make a difference. We know enough now to know what needs to be done in the most drastic situation - not that we have reached that situation yet. 

These things are important to keep in mind because they keep us in check. Worrying about inflation when you have a well-designed, goal-driven investment strategy is a waste of precious time. Your portfolio is built to last for the long term, regardless of what lies ahead. 

Speaking of what lies ahead, next week we’ll talk more about inflation - in a good way! We’ll talk about equities, why you own them, and why they will help dilute your worries.

Until next time…