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Who’s Afraid of the Big Bad Wolf: Demystifying Inflation Part 4

Who’s Afraid of the Big Bad Wolf: Demystifying Inflation Part 4

| July 28, 2021
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Inflation: Why We Shouldn’t Worry

 

You made it through the end of this blog series, which means you’ve made it through another month of potential inflation, and you’re still alive! I’m proud of you! That achievement alone is one of the best real life examples for what to know about inflation in the long-term: it won’t kill you. It might make you so stressed out that you feel like killing someone else, but that’s the next bridge we have left to cross this month. Hopefully, by the end of today’s blog, your fear of inflation will deflate entirely (let’s pause and appreciate my pun), and you’ll feel safe knowing that inflation will not be your cause of death. Nor will you cause the death of the Super Couponer in front of you at the grocery store simply because inflation has put you on the edge and it only took a single stack of 50% off pringles to push you over it. Our goal is to be calm, rational, relaxed human beings with a good grasp on inflation so that ourselves, our investments, and our sanity do not suffer, and neither do the Super Couponers. We are above such violence. Unless they buy the last stock of toilet paper. Then you can do as you wish.

 

Panic is Popular

 

Keep in mind that panic is popular. Actually, panic is people’s favorite pastime. We all experienced the toilet-paper fiasco earlier this year. It wasn’t coupners that caused that one - it was panic! That’s right, panic is the reason you had paper towels hanging in your bathroom for two weeks. Mass hysteria was scaring the crap (lyes I meant to do that) out of us, and we were begging it not to.

 

Panic has caused a lot of the trouble - a lot of the time. The best way to beat it is to realize that panic is often something that makes the problem worse than it ever needed to be. Once we understand this, we can find the benefits of calming down, chilling out, and seeing things for what they truly are.

 

For example, people love to panic about inflation as soon as they get word that it is rising. A strong threat of inflation means that some companies choose to raise their prices on goods and services earlier than necessary out of fear of lost earnings. This reaction actually forces inflation to take a stronger foothold in society, because prices are rising even quicker than they originally would.

 

It can also mean that people begin spending in massive amounts trying to rid themselves of the dollars they know are declining in value. They want to spend it on things that are of greater use to them than less valuable money, and this rapid growth in demand for products forces the prices on those products to rise even more. Then, inflation worsens.

 

Of course, the impact of increased spending will only perpetuate the bad side of inflation when we do it in mass quantities. As we discussed last week, some spending during inflation is actually a good sign, and a good way for the economy to experience some growth. What’s important to realize is that things only start to get bad when we do them in massive amounts, and what moves the masses more than anything? That’s right! Panic.

 

So, please don’t panic. Kick back, relax, and rest assured that those paper towels don’t need to go back in your bathroom if we stay calm. Let’s save that crap for later!

 

Where Has Inflation Been?

 

Part of knowing where inflation is going is understanding where it has been. Then, we can take those patterns and re-translate them into today’s questions and concerns. It’s a little bit like asking your date how many relationships they’ve been in. When they tell you they’ve been married four times and each of their exes have passed away from mysterious causes, you know it’s time to get out of there.

 

Remember, inflation won’t kill you (like that date probably would), but it has been around the block a few times, too. We’ve seen inflation rise and fall before, and we seen it happen all at the same time.

 

One of the ways that inflation is usually managed is by the natural offset of prices rising in one area while they fall in another. For example, the price of buying new and used cars rose during the pandemic, but the price of airfare plummeted (like it should when that baby in the back keeps screaming). That's only one recent example, but the general principle has happened a million times over.

 

So, inflation can be happening even in the times when no one is talking about it. Actually, it is happening. The prices of certain inflated goods/services are simply being offset by declining prices in other areas. As a result, inflation is managed naturally.

 

Where is Inflation Now?

 

One of the big reasons you are reading a blog series dedicated to inflation is because it has been a hot topic recently. Your newsfeed is flooded with inflation threats, your mom is on Facebook pretending to be an economist with a word on why we should worry about rising prices, killing the couponer is looking more and more attractive right now - I get it.

 

The reason there is so much talk surrounding inflation right now is because of the pandemic that we are currently crawling out of. A lot of people are worried that the lack of spending and growth during our quarantine year will be met with extreme spending now that we are beginning to recover. This along with the large chunk of change we spent on stimulus checks make some people worry that the rise in demand for goods and services as we return to normalcy will exceed what we are prepared for. Demand rises and supply stays the same and boom! Inflation.  

 

The unique situation surrounding this inflation spike is likely the reason for the hysteria that will surround it as well. But please remember the first part of this post: panic is popular. We’re not in  

highschool anymore, and it's no longer fun to be friends with the cool kid. Joining that popular group of panicked people will only lead to greater risk that inflation will rise.

 

Where Inflation is Going?

 

But, what about where inflation is going? Surely inflation will be different this time around! Isn’t that what you told your friends when you got back with your ex? How did that work out for you? I’ll let the blocked numbers list on your cell phone speak for itself.

 

No, inflation will probably not be different. It will rise, we will get scared, and scream until it drops again. It will be the same rollercoaster ride we talked about last week - over and over and over again. But we do have ways to block it. None of them are as easy as hitting a button on a cell-phone, but at least they exist.

 

One of the initial impacts you might feel from inflation is a rise in interest rates. This is the government's way of decreasing spending which can help halt inflation. Recently, interest rates have been exceptionally low. That makes it easier to buy a car, get a loan, make investments, etc. When interest rates increase, it becomes more expensive to borrow money and more lucrative to save it. Your savings will accumulate greater interest payments if the interest rate is higher (duh), and your loans will accumulate greater debt if the interest you pay on them rises (ugh). So, there are things that the government can do if inflation gets out of hand. Before you argue that rising interest rates aren’t exactly the most attractive solution, remember that there are ways to benefit from them. For example, your savings can grow like we discussed. Yes, that’s right, your savings. It’s that little, lonely money supply that you treat like a second checking account. Remember him? He’s probably starving at the moment, but inflation could feed him if we look on the bright side.

 

Bottom Line

 

So far, the amount that inflation has risen is significant, but not scary. Honestly, it is to be expected. We are coming out of a long year with little spending, so the jump we see in demand for products, experiences, and services is predictable.

 

The only other thing we should predict is a gradual stabilization. As the country returns to normalcy, and we get used to being able to drink away our worries at the bar with our friends again, the economy and inflation should return to normalcy along with it. Then, you can drink about some other recurring problem, like gas prices or taxes or your mother coming to visit.

 

So, don’t worry. This isn’t the economy's first rodeo. You’ll see inflation return to the ring again and again in your lifetime. Worrying will only lead to worse outcomes. Keep calm. Keep casual. Keep the couponer alive. And keep coming back for more blogs!

 

Until next time…

 

Sources: https://www.vox.com/policy-and-politics/22346376/inflation-rate-explained-federal-reserve

 

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes.

 

Investing involves risks including possible loss of principal. No strategy assures success or protects against loss. All performance referenced is historical and is no guarantee of future results. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market. Bonds are subject to market and interest rate risk if sold prior to maturity.

 

Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Municipal bonds are subject to availability and change in price. They are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply. If sold prior to maturity, capital gains tax could apply.

Investing in mutual funds involves risk, including possible loss of principal. Fund value will fluctuate with market conditions and it may not achieve its investment objective.

Options are not suitable for all investors and certain option strategies may expose investors to significant potential losses such as losing entire amount paid for the option. The fast price swings in currencies will result in significant volatility in an investor’s holdings.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.

 

 

 

 

 

 

 

 



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