_{Originally posted 11/15/2021}

Inflation has been coming in hot, at 6.2% over the past 12 months. Many warned throughout 2020 that inflationary pressures may be coming, due to fiscal stimulus measures that were taken. I even raised concerns myself in our 2nd quarter commentary from 2020 using wisdom from Jeremy Siegel. Transitory became the buzz word from the Federal Reserve as they insisted the price increases would only be temporary. However, a quick Google analysis which I placed below will show how the narrative has shifted from “inflation is transitory” to “inflation is good for you”.:

Transitory is the Story

It seems the “inflation is transitory” narrative is as factual as the “stay home for 15 days and we can slow the spread of COVID” narrative. When wages reset higher, they generally don’t reset lower in the future. Medicare premiums are now scheduled to go up 14.5% in 2022. It’s improbable they will go back down at some point. Insurance companies are already catching up with higher replacement costs on homes. Again, it’s unlikely these costs are reset lower in the future. There are items that can be quite volatile and experience temporary price shocks, such as we saw in lumber or as we have seen throughout history in oil prices. But I’m afraid the average American’s cost of living is experiencing permanent increases.

When most Americans hear “inflation is transitory” they probably think that costs are high now and they will be lower at a later point. What’s more likely to be meant by transitory, is that costs have gone up 6.2% the last 12 months, and they may only go up 3% – 4% the next 12 months. Costs will still go up, but at a slower rate. Since 1956 we have only seen one calendar year with a negative inflation rate (-0.40% in 2009, Source: Minneapolis Fed).

When you start to see articles that “inflation is good for you” (which it isn’t, more on that below), it does become worrisome that higher or more sustained above average inflation is heading our way.

The Real Wealth Tax (Inflation isn’t good for you)

While there has been much talk of a “wealth tax” over the last few years, it sometimes gets lost in the conversation that we already have a wealth tax. It’s called inflation, it is intentional, and it affects just about everyone. The Fed has always targeted a positive long-term inflation rate in the 2% range. The theory is that a little bit of inflation is better for everyone than any sort of deflation. Right now the inflation rate is well above the Fed’s long-term target. There are various reasons why this is happening; massive federal deficits the last few years due to stimulus measures, off the charts consumer spending, and supply chain issues are a few of them.

The last time we saw inflation near this level was in 1990. Inflation clocked in at 6.1% that year, but you could have parked your money in One-Month riskless US Treasury Bills and earned 7.8%. Actually from 1990-1999, riskless T-Bills beat inflation by 1.90% annually (Source: DFA Matrix Book 2021).

Those days are over. Even today with the 6.2% inflation number, we are seeing bank yields well under 1%, and treasury bonds out to 30 year maturities are under 2%. If you want to get a rate of return on your money higher than the rate of inflation, you must bear the risk of market volatility. From 2009 – 2020, One-Month US Treasury Bills have underperformed the inflation rate by 2.6% annually (Source: DFA Matrix Book 2021) which would have eroded a cumulative 27% of your wealth during that timeframe.

The argument that inflation is good for you is largely presented from the angle that wages are increasing and the real value of your debt is decreasing. That is true to an extent, but as your wages are increasing so is your cost of living. The question is are your wages going up quicker than your cost of living is going up? Doesn’t look like it as of late.

The Alternative History

We all knew with the dire fiscal measures were being taken by the Federal Government throughout 2020 that there would be a long-term cost. The high inflation we are seeing at the moment is part of that cost. The question is, is the cost worth it? We have no way of knowing how an alternative history would have played out if the government failed to take large and quick action. Many countries around the world had similar responses to COVID and also took dire fiscal measures.

The conventional wisdom is that the long-term cost would come via higher taxation. While that could still happen it’s starting to seem like the present cost of the fiscal stimulus is your dollars being worth less than they were before.