Why I’m Not (Too) Worried About Inflation

“Wall Street climbs a wall of worry.”  You’ve heard that one before.  Inflation is one of the latest worries investors are talking about.  Although the Federal Reserve doesn’t seem that concerned, rising inflation is usually accompanied by rising interest rates as the Fed this to cool down the economy.  Personally, I’m not that worried about inflation.

Many investors would welcome inflation because it would mean higher interest rates.  Lots of retirement income problems could be solved if clients could get an 8% interest rate on bank CDs or highly rated bonds.  Since those rates haven’t been available for years, you have probably discussed total return investing with clients as an alternative.

Here’s why I’m not too worried about inflation in terms most people can relate to easily.

  1. Food prices are rising.  This has been happening for years.  When your client goes to the grocery store, they see prices creeping up. You see price inflation on restaurant menus.  This isn’t a problem that appeared overnight.  What most shoppers do is consider alternatives.  If chicken prices rise sharply, they look to pork.  They find substitutions.
  2. Supermarkets are more expensive.  My wife remarks certain chains seem to have increased prices across the board.  In the United States, we are used to an economy based on capitalism.  New players enter the marketplace.  Aldi and Lidl are two German supermarket chains that have been expanding rapidly across the US.  They are discount operations, promoting their own label brands.  The stores are large and clean.  They win awards.  They are a lot cheaper than traditional competitors.  If you haven’t been in one yet, check it out.  When some players in a market try to raise prices, other players seek to gain market share by driving prices down.
  3. There might be a chicken shortage.  Nothing gets people buying faster than the possibility of a shortage.  We saw it with paper towels and toilet paper at the start of the pandemic lockdown.  We heard there might be a chicken shortage.  It only takes eight to twelve weeks to raise a meat chicken to maturity.  How long could a chicken shortage possibly last?
  4. Lumber prices have shot up.  This shouldn’t be a surprise. People weren’t able to travel for most of 2020.  Even now, foreign travel isn’t officially sanctioned.  As a result, many people decided to do home additions or relandscape their outdoor space.  This put almost all the contractors to work and consumed a larger than normal amount of building materials.  People won’t be adding additions to their homes every year.
  5. House prices are rising.  This is likely due to the SALT deduction limitation.  People in cities like New York or states like New Jersey were used to taking their property and school taxes as a deduction when filing their income taxes.  Now the deduction is capped at $ 10,000 annually.  Logically, people in the higher tax places are looking to move to lower tax ones.  Property prices might be rising in your area, but what about places like New York City, where people are leaving?
  6. Restaurant prices.  Prices are higher, but for different reasons.  You can’t get too angry.  After months and months of lockdown followed by outdoor dining only, restaurants and bars are finally starting to reopen.  Your bill will be higher because no one is going to run “half off appetizer” sales or buy one drink, get the second drink free promotions when their reservation book is booked solid.  This too shall pass.  
  7. Hotels and airfares.  Vacation travel will likely resume soon.  There’s so much pent up demand, there will likely be an initial surge.  Airlines and hotels have been suffering.  They will try making as much money as they can as quickly as they can.  This should abate as more countries open up and airlines add more routes.
  8. Face masks.  At the start of the pandemic, they were impossible to find.  As the months passed, supply increased as new sources were found.  Companies offered logoed PPE face masks.  Recently, Costco offered general use face masks, on sale at $ 19.99 in packages of 100.  When a shortage develops, supply often increases.
  9. Oil prices.  Everyone watches prices at the pump.  Once crude oil prices rise past certain levels, wells and alternative sources like shale oil become economically viable.  More supply comes into the market, decreasing prices.

Yes, there are price increases that don’t follow the supply and demand logic.  Health care costs tend to rise faster than inflation.  Property taxes and school taxes seem immune to market forces.  Generally speaking, this is similar to the rush to buy really hot concert tickets.  Price should stabilize, but you need to be patient.

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