Inflation Worries Keeping You Awake?

Inflation Worries Keeping You Awake?

According to a recent Harvard CAPS/Harris poll, reported at, 85% of respondents are concerned about inflation, and 45% are very concerned. Beyond polling data, we can tell from looking at Google trend graphs that searches for information on inflation more than doubled in May, and that keyword search continues to be above average. Google’s published trending keywords such as inflation can be seen here. Although those searches may have peaked in May, they are still above average as we experience alarming price surges in various sectors of the economy.

More inflation means that the purchasing power of your income is going down. If you’re a retiree living on a fixed income, that may mean making adjustments to how you plan your purchases. However, it’s not as easy as it seems to know exactly how much inflation is going on, because not everyone consumes the same basket of goods, or lives in the same area with the same costs.

Is inflation going to rise continuously, or did it just spike for a couple months?

When you have low supply and high demand for a product or service, the price goes up. However, it becomes more complicated in the long term. When you have low supply and high demand, you have more profitability and incentive for new suppliers to enter the market. This brings supply up to meet the demand, stabilizing the price, perhaps even bringing down.

As we’ve come out of lock-down, there have been several supply chain disruptions that have led to spot shortages and big price increases. One example is lumber, which rose in price to historic highs, but has already come down over 40% since in high point in May. Similarly, used car prices have shot up over 25% because of the semi-conductor shortage reducing the amount of new inventory, but we may see those prices come back down as supply returns to normal. Gasoline shortages have emerged in some areas not because of a product shortfall, but because there is a shortage of truckers qualified to deliver it.

Taking a further step back, it’s important to recognize that some of the price increases are actually prices returning to pre-pandemic levels. When we look at airlines and hotels for May and June 2020, prices were significantly depressed compared to 2019 because of the lock-downs. A two or three year analysis of those sectors would show a less dramatic increase in prices.

Taking these types of factors into account, the Federal Reserve suggested that some of the observed inflation was “transitory,” because the higher prices wouldn’t persist over time. On the other hand, in the last month the Fed also took into account additional factors such as wage increases. Taken individually, wage increases are healthy, motivational, and wonderful. On aggregate, they tend to have the effect of increasing costs all along the distribution chain to the consumer. Reducing wages is difficult for a business, so these changes are likely to persist over time.

In June, The Federal Reserve acknowledged that not all the price increases are “transitory” and so they may need to push up the schedule for raising interest rates sooner than expected, but still likely not until 2023.

Is inflation the same everywhere?

There are many factors that impact inflation, so it can vary greatly from one area to another. An area that already has high wages may not have experienced as much of a need for wage growth to recruit employees. A rural area that is hard to get to might be impacted more by the cost of shipping goods when energy costs go up.

The U.S Bureau of Labor Statistics measures the Consumer Price Index (CPI) in different areas, looking at what people are paying for a defined basked of goods, giving part of the picture of how much inflation is rising. While the National Increase for May was over 5% for the CPI, one can see the Northeast region report that includes New Jersey and Pennsylvania was a little less than 4%.

Should I do anything differently?

Inflation should always be a concern for consumers, employers, and investors. It can mean the dollar can’t buy as much, employers need to offer more to recruit talent, and investors may need to adjust their portfolios. This phenomenon isn’t new, and though inflation may have risen sharply in May and June this year in a year over year comparison, from a historical perspective we are still far away from the double-digit numbers we saw forty years ago in 1981.

If higher inflation persists over an extended period of time, it can become a real issue for retirees, and if interest rates go up it can have a real effect on portfolios. This is a good reminder that we should be looking preserving purchasing power, not just principal, when a portfolio needs to last a lifetime. Bonds present market risk, as bond prices fall when interest rates rise. On paper a bond portfolio may contract in value as interest rates go up. A special type of bond known as Treasury Inflation-Protected Securities, or TIPS might be considered by the inflation-wary, as their principal value is linked to the consumer price index.

At Garden State Trust Company, we build portfolios one investment at a time to incorporate our clients’ objectives, appetite for risk, income needs, liquidity requirements, tax considerations, and other specific objectives that may govern how the portfolio is to be managed. If you are concerned about inflation or the loss of purchasing power in your portfolio, we’d be pleased to provide a consultation.