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Cost of Inflation

Peter Katevatis - Mar 07, 2018
I have written about inflation before and due to the myriad of responses and questions I figured I will touch on it again.  Simply put, inflation is the rising cost of the basket of goods that consumers buy.  Remember when a loaf of bread was less th

I have written about inflation before and due to the myriad of responses and questions I figured I will touch on it again.  Simply put, inflation is the rising cost of the basket of goods that consumers buy.  Remember when a loaf of bread was less than $1.00?  A nice loaf today is pushing $5.00!

 

Cost of Inflation

 

Ever since the Great Recession of 2007-2008 we have had central banks around the world lower interest rates to near 0% and governments have taken on much of the debt that could not be paid back.  We never really solved the problem from the last decade, we just kicked the can down the road.

 

Canaccord Genuity’s technical analyst Tony Dwyer is often on CNBC, BNN, and Bloomberg, stating that you cannot fix a debt problem with more debt.  It will end badly but not for a while.

 

There are only two ways in history that a debt problem was solved:

  • Default, then cancelling the debt
  • Inflation

The world’s economists are fully aware of this so given the choices above there is general acceptance that option #2 is less painful.  Inflation has already crept into our economy and I feel it is safe to assume that the central bankers will let it simmer for longer than normal.

 

The shock to the markets in February was partly blamed on this rising inflation phenomenon and the expectation that the US Federal Reserve will be more aggressive in raising interest rates than originally expected.  Rising inflation is good for multiple asset classes including Equities (stocks), Real Estate, and Gold, however all three of those sectors are under pressure in some form.  The concern of the central bankers raising rates to curb inflation seems to be valid, but too early.

 

The counter argument for inflation is that there also many dis-inflationary pressures at work.  One of the largest is demographics as baby boomers retire and slow down their consumption.  Millennials may pick up the slack but they tend to want everything for free.  Also, with more automation (driverless cars & trucks), online retail (Amazon vs all physical stores) we might see higher unemployment in the future.  The falling price of gold is showing signals of lower inflation which flies in the face of the February worries.

 

All these factors lead me to one conclusion… the rest of 2018 will be much more volatile than 2017.  Volatility is not necessarily a bad thing but it will take some tough resolve for investors to refrain from  buying too high or selling too low.