How today’s inflationary environment is similar and different from the great inflation of the 1970s. What are the best assets to protect your portfolio if the next great inflation is here.
Topics covered include:
- How is inflation measured and why the pandemic made calculating inflation difficult
- What causes inflation
- Why is inflation increasing currently
- What caused the great inflation of the 1970s
- Which assets are best to own to protect against inflation
Show Notes
A Complete Guide to Understanding and Protecting Against Inflation—Money For The Rest of Us
Great Inflation 2.0? Lessons from the 1970s by Simon Macadam—Capital Economics
If Inflation Is Coming, Here Is What to Do About It by James Mackintosh—The Wall Street Journal
A Complete Guide to Investing in TIPS and I Bonds—Money For The Rest of Us
334 Plus: A New Inflation ETF, Inverse ETFs, and Excess CAPE Yields—Money For The Rest of Us
IVOL ETF Analysis and Review—Money For The Rest of Us
What is Roll Yield and How It Impacts Commodity and VIX ETF Returns—Money For The Rest of Us
DIVIDENDS: THEORY AND EMPIRICAL EVIDENCE—Aaron Brask Capital, LLC.
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A Complete Guide to Understanding and Protecting Against Inflation
A Complete Guide to Investing in TIPS and I Bonds
What is Roll Yield and How It Impacts Commodity and VIX ETF Returns
337: Why in the World Would You Own Bonds?
338: The National Debt, Inflation, and the U.S. Dollar—What Could Go Wrong?
367: What Investment Strategies Do Best During High Inflation Periods?
400: What If High Inflation Doesn’t End?
429: Which Inflation Protection Strategies Worked and Which Didn’t?
Transcript
Welcome to Money For the Rest of Us. This is a personal finance show on money, how it works, how to invest it and how to live without worrying about it. I’m your host, David Stein. Today’s episode, 342. It’s titled “Is another great inflation coming?”
I recently got an email from a member of Money For the Rest of Us Plus, and he said he had just gone shopping for some facial tissues, Kleenex, and saw pricing had been raised at the national retailer by over 20% on single packages, and 33% on four-packs. He mentioned he had sold to big box stores all his career and knew how difficult it is to get a price increase that big at a store. This concerns him because he saw it as another signal that consumer costs are headed up.
He mentioned the last time he saw price increases like he’s seeing, anecdotally, was in mid-2008. He’s also seeing it in his professional life, as supply chains have struggled with shortages, and suppliers are increasing prices. The business surveys that were done around the world, known as PMI data, the prices paid subcomponents are at the highest levels they have been since 2008.
In this episode, we’re going to take a look at “Is a great inflation coming?” An inflation like we saw around the world from the late 1960s to the early 1980s. What would cause that, and what should we do about it from an investment standpoint? What assets can we own to survive a great inflation?
What Is Inflation and How Is It Measured
Now, as a review, inflation measures the rise in prices over time. The more the overall prices of food, housing, clothes, healthcare and other goods and services increase, the greater the rate of inflation.
Government’s statistical agencies such as the U.S. Bureau of Labor Statistics in the U.S. measure inflation by calculating how the prices of items that are included in a reference basket change from one period to the next. In the U.S. the reference basket used to calculate the U.S. Consumer Price Index has over 200 categories of goods and services purchased by households and businesses, and they’re divided into eight major groups: food and beverages, housing, apparel, transportation, medical care, recreation, education, and communication.
There’s some judgment when it comes to measuring inflation, and the pandemic has made that measurement more difficult. In countries such as those in Europe, where the lockdowns were more restrictive, it was more difficult for statisticians to assess how much prices fell during the lockdown period because the price checkers were stuck at home. In the U.S, where the lockdowns were less severe, U.S. statisticians that work for the BLS were able to get out more.
And this actually shows up in the inflation numbers, because the price of airfare, for example, fell more in the U.S. because statisticians were able to capture it more. Whereas in Europe, a lot more categories of prices were imputed rather than checked physically. That means one year later the U.S. could show a larger inflation rate because it’s being compared to prices a year ago that had fallen further than other countries, simply based on how the prices a year ago were determined; were they checked in the stores, or were they imputed based on price trends?
Another thing that impacts inflation is the weights of the goods and services within the reference baskets. Those consumption habits might have changed during the lockdown, and so the weights might actually be off.
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