Skip to main content

  •  Tel: 908-789-1100
  •  Fax: 908-789-1115
  • info@sfehrlich.com 
  • Book a Meeting
  •  
  •  

  • Home
  • About Us
    • Meet the Team
    • Who We Are
  • Our Services
    • Investing
    • Financial Planning
    • Social Security
    • Our Fees
    • Pro Bono
  • Our Thinking
    • Blog: Managing Your Money
    • Thinking Social Security
    • Newsletters
  • Disclosures
  • FAQ
  • Contact

Proactive Planning

for a solid future

Helping You

manage the changing face of life

Our Mission

your success is our only mission

Proactive Planning

for a solid future

Helping You

manage the changing face of life

  Previous   Next

    You are here

  1. Home
  2. Blogs
  3. Inflation: Time to worry?

Inflation: Time to worry?

Submitted by S. F. Ehrlich Associates, Inc. on January 6th, 2022
  • Share on Facebook
  • Facebook Like
  • Google Plus One
  • Tweet Widget
  • Linkedin Share Button
  • Pinterest

December 31, 2021

Writing in the NY Times Business section1, Jeanna Smialek provided a brief yet thorough treatise as to what causes inflation and how it might affect us over the near term. Considering that articles about inflation have been widespread of late, it might be useful to understand how it might impact both your purchasing power and portfolio.

What causes inflation? “In the short term, high inflation can be the result of a hot economy – one in which people have a lot of surplus cash or are accessing a lot of credit and want to spend. If consumers are buying goods and services eagerly enough, businesses may need to raise prices because they lack adequate supply. Or companies may choose to charge more because they realize they can raise prices and improve their profits without losing customers.” When COVID struck, a lot of manufacturing facilities closed, and reopening them has caused supply chain problems as they attempt to ramp up production. The combination of limited supplies and pent-up demand by consumers have also contributed to significant price increases. (It’s the classic Supply and Demand curve from Economics 101.) The auto industry is just one example; not only did a computer chip shortage crimp production, but consumers rushed out to buy cars.

Where is inflation headed? There is some speculation among economists that inflation will slow as supply lines become more efficient, with more goods on the shelves leading to lower prices. While labor costs have gone higher for both blue and white-collar jobs, many of those pay increases have been factored into pricing. It’s unlikely that labor rates that quickly moved to $15-20/hour will take another dramatic leap anytime soon. While it’s likely that inflation will slow, there’s always the possibility that rising prices will force still higher labor costs (followed by even higher prices), a cycle that never ends well.

Is inflation bad? The answer depends on where you sit. For retirees on fixed incomes or families with modest incomes, low inflation means dramatically smaller losses in spending power. (Loss of spending power is ultimately the true definition of inflation.) If you’re an investor, retired or otherwise, low inflation also results in less income on the bond side of a portfolio. When publicly traded companies borrow money to expand, they sell bonds to investors to raise capital. Low inflation means low interest rates to those bond-holders, and it’s those bonds that comprise the bond funds in portfolios. Higher inflation would translate into additional income. In that regard, modest inflation would be welcome for investors. Even if you’re a wage earner who just had a significant increase in hourly wages, you’re still ahead if the increase in your salary exceeds the increased cost for goods that you buy.

How does inflation affect the stock market? Through the end of November 2021, the rate of inflation was 6.8%, the highest rate in almost 40 years, driven mostly by increased labor costs and a supply shortage. In response, the stock market has continued it’s steady upward march, assuming supply shortages will be eliminated and labor costs will mitigate.  Of course, if the rate of inflation doesn’t slow, the outlook for the stock market could turn down. “Really high inflation typically spells trouble for stocks…Financial assets in general have historically fared badly during inflation booms…Companies that lack pricing power – meaning they cannot easily pass costs on to customers – suffer the worst, because they are forced to absorb input cost increases by taking a hit to their profit margins.” Obviously, we’ll learn a lot more in the months ahead.

 

 

1 Smialek, Jeanna. “Explaining Inflation: Effects on the Economy Are Stark and Nuanced.” The New York Times, 24 Dec. 2021.
 
 
 
Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by S.F. Ehrlich Associates, Inc. (“SFEA”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from SFEA.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  SFEA is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of SFEA’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a SFEA client, please remember to contact SFEA, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing, evaluating, or revising our previous recommendations and/or services.
Tags:
  • Investment
  • Retirement planning

Book a Meeting

Tell a Friend

Recent blog posts

  • Stan's World - Here we go again
  • Protecting against inflation - How about an I Bond?
  • The bumpy road to the market's long-term average
  • Stan's World - The Talk
  • Spend less and live longer or spend more and die younger?
  • Have you checked your insurance lately?
  • Stan's World - Doing good can lead to living well
  • Market highs and inflation - The risk of assumption
  • Why is it so hard for people to manage their own money?
  • Stan's World - Embracing change (and pastrami)
more

Categories

  • Charity (8)
  • College (1)
  • Cybersecurity (1)
  • Estate Planning (8)
  • Financial planning (58)
  • Insurance (1)
  • Investment (20)
  • Portfolio risk (3)
  • Retirement planning (18)
  • Social Security (11)

15 Alden Street, Suite 12
Cranford, NJ 07016

  •  Tel: 908-789-1100
  •  Fax: 908-789-1115
  •  info@sfehrlich.com
  •  
  •  
  •  

S.F. Ehrlich Associates, Inc. is a Registered Investment Advisor registered with the U.S. Securities and Exchange Commission. S.F. Ehrlich Associates, Inc. does not offer or intend to offer asset management, financial planning, or investment advice through this website. The dissemination of general information pertaining to our investment advisory and financial planning practice is the purpose to which this website is limited. The foregoing information and opinions are for general information only.

S.F. Ehrlich Associates, Inc. does not guarantee the accuracy and completeness of information contained on this website, nor assume liability for any loss which may result from the reliance by any person upon such information or opinions. Such information and opinions are subject to change without notice, are for general information only, and are not intended as an offer or solicitation with respect to the purchase or sale of any security or the offering of individual or personalized investment advice. In addition, S.F. Ehrlich Associates, Inc. does not offer insurance, legal, or accounting services.

The content available through this website is the property of S.F. Ehrlich Associates, Inc. and is protected by copyright and/or other intellectual property laws. Content received through this site may be displayed, reformatted, and printed for personal, non-commercial use only.

Additional Important Disclosures

© 2022 S.F. Ehrlich Associates, Inc. . All rights reserved.