Inflation: Resurrection or Another Head Fake


John Micklitsch, CFA CAIA, President & Chief Investment Officer

Raising Inflation Cartoon

Just when you thought it was dead and buried, inflation, which is defined by the Oxford Dictionary as a general increase in prices and fall in the purchasing value of money, has re-entered the market narrative. Driven by the trifecta of fiscal stimulus, accommodative monetary policy and a potentially synchronized global economic recovery post-COVID, inflation is very much back on the minds of investors.

Investors fear inflation because it erodes real returns and reduces the value of future cash flows. Economists fear inflation because, if inflation rises too much or too quickly, it may require policy makers to slam the brakes on the economy by raising interest rates as former Fed Chairman Paul Volker did back in the early 1980s. Corporations fear inflation because it can eat into margins and earnings if they aren’t able to pass along price increases to their customers or if higher associated interest rates raise borrowing costs. Consumers fear inflation because it reduces their purchasing power and the value of their savings. About the only people who have made peace with inflation are some political figures who view it as the least-negative path forward following decades of excessive spending. Remember, nobody is ever on record casting a vote for inflation.

But is there such a thing as good inflation or is all inflation bad? The answer, like most things in life, lies somewhere in the middle. When mild inflation is a sign of increased consumer demand or an economy that is getting back on its feet, a little inflation can be a good thing and a positive signal. When inflation is more aggressive or the result of bad policy, however, it can be harder to put a positive spin on the rising cost picture and, more importantly, it can be harder to control.

For much of the last three decades, the U.S. economy has enjoyed below-average inflation. This is despite the onset of deficit spending that started in the 1980s and has continued to the present. The lack of inflation or consequences has led many to promote a new concept called Modern Monetary Theory (MMT), essentially espousing that deficits don’t matter and that technology and higher taxes will keep inflation at bay. To us, this is a little like saying credit card debt doesn’t matter if the interest rate is low. Eventually, the rate may go up, then what?

Nobody knows for sure the form or magnitude inflation will take this time around, but it is certainly prudent, in our opinion, to assess your portfolio’s readiness and your personal planning needs considering the current potential for higher inflation. If such a review leads to a path of saving more and spending less, there are worse things that could happen to one’s financial foundation. If it leads to portfolio and planning adjustments that allow you stay on the offensive, even better.

Ancora has the planning expertise and investment strategies for dealing with a wide variety of market environments, including more inflationary ones. We invite you to engage with us about your questions, comments and concerns regarding inflation. Together, we can help ensure that neither inflation nor any other roadblock derails your long-term plans or your personal definition of investment success.

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