WIN: Whip Inflation NOW

Question: Should I be concerned about inflation?

Answer: Inflation is defined as too many dollars chasing too few goods. During COVID, governments around the world increased spending and kept interest rates essentially at zero. This led to a 40% increase in the money supply and is pushing prices up in many areas. Extra government spending contributed to inflation. Now the Fed is raising interest rates to increase the “cost” of money and slow inflation. Another way to reduce inflation is for government to limit and reduce their spending. The challenge continues to be how to slow inflation while not stifling growth. 

Investors have seen wages, house prices, and investments outpace inflation for years. Low interest rates or “easy money” created higher standards of living along with the financial stimulus during COVID. The official metrics of inflation for the “average” consumer indicate that the additional cost of living per month is up substantially from pre-COVID levels. This is due to higher costs for energy, housing, groceries, and utilities as shown in the chart with data from FactSet as of April 29, 2022. It’s not all due to COVID - we’re also dealing with supply chain issues, Chinese lockdowns, higher domestic crime rates, and the Russian Invasion of Ukraine influencing energy and food prices. 

As Mark Twain stated, “History does not repeat itself, but it often rhymes” indicating that it may be worthwhile to look back at the 1970s. As a quick reminder, the Watergate scandal led to President Nixon’s resignation and Gerald Ford became President of the United States on August 9, 1974. It was August 15, 1971, that President Nixon removed the U.S. from the gold standard. Prior to this, the government held the price of gold at $35/ounce and dollars were converted at this rate into gold. WIN was the acronym coined in 1974 by President Gerald Ford to combat inflation. The premise was that citizens could reduce inflation and rising prices via “voluntary actions.” Sadly, the plan was a disaster. 

By 1974 inflation was rampant, but the difference between then and now is that there was rising unemployment as well. That is not the case today. The December 1974 unemployment rate was 7.2% and inflation was 12.3% year-over year. In comparison, as this is being written, our current unemployment and inflation rates are 3.5% and 8.5%. High inflation rates reflect strong demand and restrained supply. The Fed can’t do much about supply, but it is working to slow demand. Fed Chairman Powell said that the Fed will do what is necessary to bring down inflation. This means much slower economic growth and a possible recession. We don’t appear to be in a situation where a downturn would do prolonged financial damage. 

Oil and food prices are hurting consumers. Food inflation is being caused by weather patterns, wage growth, the war in Ukraine, and withholding or bans by key export countries. The start of export bans across the globe place further pressure on commodity prices because restrictions have historically led to panic buying. Contrary to mass media reports, Ukraine Ministry of Agriculture projects it will be able to plant approximately 75% of this year’s spring crop, far from a complete loss. Clearly there are a few risk factors including food and energy prices and China lockdowns (18% of total U.S. imports come from China). As we shift from extreme spending on goods to more dollars going towards services and experiences, the pressure on the supply chain will lessen. Everyone who remodeled and redecorated while working from home will either save more or redirect those additional dollars to other areas with employment back to pre-COVID levels. Fundamentals and earnings continue to suggest opportunities for longer-term investors. 

We’re keeping our eyes on energy costs, capital expenditures and supply chain movement with the economy’s long-term prospects remaining hopeful. In addition, lower tax rates are known to boost work and investment, which enhances the economy, making inflation easier to control. Monetary policy is important, but creation of jobs, goods, and services will also help make it easier for the Fed to steer us through this exceptional time.

In closing, here’s an interesting factoid: President Ford’s WIN program buttons were the best-selling buttons since the smiley face buttons came out in 1971. Stay focused and plan accordingly as we navigate the tug of war between growth and inflation. 

The opinions expressed are those of the writer as of May 8, 2022, but not necessarily those of Raymond James and Associates, and are subject to change at any time. This material is provided for educational and informational purposes only. Past performance is no guarantee of future results. There is no assurance the trends mentioned will continue or that forecasts discussed will be realized. Economic and market conditions are subject to change. All investments are subject to risk, including loss.

“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.” This article was provided by Darcie Guerin, CFP®, First Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at (239)389-1041, email darcie.guerin@raymondjames.com Website: www.raymondjames.com/Darcie.