Inflation!

by Tim Tremblay

Source: Getty Images

Just the mention of the word is disturbing. And although it has always been a part of our economy, we are never comfortable with inflation. Remember when Hostess cupcakes were "2 for 5 cents?" Remember when gas was 25 cents a gallon? My parents bought their home in Santa Barbara in 1971 for a little more than $20,000 and at that time they thought it was a very high price to pay. You could buy a cup of coffee in a restaurant then for 10 cents. My first "real job" at Safeway as a "box boy" paid $1.10 an hour.

My! How inflation has changed all that.

But what exactly is inflation? According to Webster's Dictionary, "Inflation is the sustained increase in the general price level of goods and services over time, eroding the purchasing power of money." Inflation has become a hot topic of discussion recently as economies around the world grapple with rising prices and the impact on individuals, businesses, and governments.  

U.S. Monetary policies can exacerbate or cause inflation. Changes in the money supply and central bank policies contribute in a big way to inflation. When central banks inject large amounts of money into the economy through measures like "quantitative easing," this increases the money supply and causes higher inflation.

Someone needs to explain this to the current administration. The money created and spent for the "Green New Deal," the open border, crime, the rising minimum wage, and higher taxes on the horizon have all contributed to our current inflation concerns.  

Higher and unpredictable costs create uncertainty in the economy. Businesses face difficulties in planning and making investment decisions as they struggle to predict future costs and prices. Businesses here in Santa Barbara County and those across the country have been forced to close their doors as a result of ongoing inflation.

The current administration would like you to believe they have inflation under control. Gas prices are certainly off their highs, as well as the costs of many of our goods and services. But it's kind of like saying I have my weight under control since I've lost 30 pounds, even though I'm still 100 pounds overweight!

Rising Yields, Rising Costs

"Hyperinflation" has led to social and political unrest throughout history, exasperating economic instability. We have seen this most recently in Venezuela with President Maduro and it continues today. Excess money-printing and deficit spending are the culprits here. The Venezuelan government tells us their inflation problem is improving (sound familiar?) and that the yearly inflation rate dropped from 686% in 2021 to 234% in 2023. It remains one of the highest inflation rates in the world; ninety-four percent of Venezuelans live in poverty and, according to statistics, over 20% have left their country.  

In 2022, inflation and interest rates soared in the U.S. and abroad. Rising yields may not be a problem if you buy a security for the income it provides and hold until maturity. But if you trade a portfolio of bonds, or hold shares in a bond mutual fund, falling bond prices with interest rate increases provide significant risk. Many of my clients, as well as banks like Silicon Valley, experienced this risk for the first time in decades as interest rates rose dramatically.

Preserve Your Investment Portfolio

It is important to stay the course with your financial plan through inflationary periods. As one is closer to retirement, preservation of principal is first and foremost; stock markets might react negatively during uncertain times and could cause a reduction in principal that is so important for income. If, on the other hand, you have plenty of time ahead to invest for retirement, a market downturn is welcomed.

Take advantage of a downturn and "dollar-cost average" by continuing to buy quality positions as the market declines. If you have the time to weather the storm, it always makes sense to buy quality stocks while they are at a low. Make sure your plan fits the economic scenario for you and adjust when appropriate.

The biggest regret some of my clients have is trying to "time the market." Those that chose to "stay the course" with their plan did well during the recent inflationary crisis. Those that pulled out when inflationary concerns became apparent were disappointed as the stock market rebounded. 

The most important aspect for inflation control is courage. Today, more than ever before, we need politicians who are willing to make courageous decisions for the future of our country. When a politician cuts spending, it is never good for his election campaign. A growing U.S. debt of over $34 trillion is not sustainable. A yearly deficit of over $1.7 trillion is not acceptable. If the U.S. Government were a business, it would be in bankruptcy. It is time to elect leaders with the courage to cut spending and have a balanced budget.

Don't spend money you don't have. What a concept.

And even in the face of dramatic events, don’t forget to remember to Stay the Course!