IS INFLATION FINALLY BACK?

In my youth my dream car was a Ford Pinto – ok don’t judge me. I was being responsible. A new Pinto back then sold for about $2500, which was still more than I could afford so I came up with $800 and found a really good used one. Well, except for the pink shag carpet the prior owner had installed, but the car usually got me where I needed to go. In those days if you were a teenager, wheels were wheels. We bought what we could afford, spent a lot of time inside the engine keeping it running, and always kept our cars clean. It was better than walking, usually.
 
My son pointed out that the current entry level model at Ford is the Fiesta. Starting at about $14,500, it is a stark reminder of the effects of inflation. Yes, the Fiesta has more features than the Pinto like airbags, Bluetooth radio and a non-exploding gas tank – all good things – but a seven-fold price increase still is a clear warning about the damaging effects inflation can have on your savings account.
 
For a number of years, inflation has not really been much of a factor in our economy. The consumer price index (CPI) since 2008 has averaged about 1.6%, which is low by historical standards. Recipients of the annual CPI based social security raise are already well aware of this. These low numbers can benefit investors however, as they need a lower rate of return to see real growth after inflation.
 
Early in 2018 America, and the stock market, were suddenly awakened to the reality that higher inflation may be on the horizon. Though it startled the markets at first, it shouldn’t cause too much concern since a growing economy needs a certain level of inflation. Inflation encourages spending and spending is good for an economy. The downside is that inflation works on your investments like a hole in a bucket of water. It drains away value that can only be recovered by adding more water to the top faster than it comes out the bottom. With inflation at 1.6% there are many ways to keep the bucket filled, but if we get back to 3% or even 4% rates, investors will have to work harder to keep up.
 
For most of my life people understood this concept well, but I fear that 10 years of very low CPI numbers may have caused some to forget that inflation poses a real economic risk to investors. It may have been largely in hiding for a decade, but it appears ready to raise its head again. Investors should take time now to review their current investments and consider how each may be affected by rising inflation and make changes if necessary.  You don’t want to find yourself 15 years from now trying to maintain your current standard of living with devalued dollars. Although, in a worse case scenario I suppose you may still be able to find an old Ford Pinto lying around.