How does today’s inflation compare to that of the 1970s? Are we headed down the same road? Join us for this episode of Coffee with Brendan to hear his take on questions arising frequently from clients.
He outlines the reality of inflation today using an illustrative historical comparison and explains how inflation affects small businesses and, ultimately, consumers. Plus, what you should consider before adjusting your investments. Don’t miss it!
Topics Discussed:
Inflation today compared to decades ago
How inflation is measured within the whole economy
Who inflation affects first – hint, small businesses!
What to expect as the consumer during periods of elevated inflation
Should you make changes to your portfolio?
Transcript:
Hi, and welcome to the second Coffee with Brendan conversation, where I actually talk to you about an actual client conversation that I had this past week. And hopefully you can learn a couple things about some of the topics that are of interest to some of my clients that I'm meeting with these days. So this question has come up not just once, but a few times. And it's about inflation and specifically, how does today's inflation compare to the 1970s? And are we going down the same road?
So let's jump in. If you watched my first one, you'll know that I like charts and graphs. And so here's our chart and graph of the day. And this is the inflation, where we are today with inflation. So as you can see, we have seen a big jump. We've seen a big jump from here which is lower than 3% a year ago to over 5% right now in inflation. So big, big jump in a short period of time. And these are the numbers up here. You got your headline, your core, your food, and your energy. So if you think about headline, headline is everything.
It's the core plus food plus energy. Core is everything. And then food and energy are pulled out. So sometimes people look at the headline, but it's a little bit misleading because yes it shows 5.2, whereas the cost of goods really are at 4%. The big thing that's really driving the headline is energy. And I think everyone knows that when you go to the gas station, your gas prices are a lot higher. Now I'm not going to get into any politics as to why that might be, but suffice it to say the world is reopening and the supply of oil is just low in the world.
And so that's one of the main reasons if there's a big demand for something and not that much supply, well the prices go up and that's pretty much what's going on right now, the cost of everything right now has been going up mainly because the cost to make things as gone up. And why has the cost of everything starting to go up? Well, when you think of inflation, one of the things that you should be thinking about is wages. One of the primary costs that any company has when sending goods out and making goods is the cost of labor. And this right here, again, shouldn't surprise anyone, but small businesses are having a heck of a time trying to fill vacancies. And in order to attract people, what do you think they do?
They raise wages and what do increased wages ultimately do to a company's profit if they don't pass those increased costs along to a customer? It's shrinks profits. And so at least at this point, companies are pretty much passing that increased cost of labor onto people. So how does this compare to the 1970s? Because that's ultimately the underlying question that a lot of my clients have had. And that's pretty much here. This is what happened in the late 70s, early 80s, where inflation was out of control. The difference here is that the economy was already in trouble in the late 70s. And then when you had an oil shock, like we did with the oil embargoes, then you had a piling on. So you had a stagnant economy. And then the cost of getting goods to market went way up with the oil situation that we had.
And so this is where they actually talk about stagflation. So stagnant economy, increased prices, everything went up and people stopped buying because the cost of everything went up as you see here, 15% on a year over year basis. So that's pretty much what drove this. Why do I think that this isn't like 1970s is because of the economy. Where the economy was in 1970 versus where the economy is today. The reason why costs are going up is because again, the unemployment rate is so low and it's so hard to find qualified workers these days that they're having to increase prices is actually a sign that the economy is actually doing really well. That the unemployment rate is so low and things are going really well. If you look at earnings, earnings right now are projected to go through the roof in the next couple of years.
So if you look... Let me see if I can find that chart, sorry for all the maneuvering around here. If you look at the earnings here, these are projections so take them for what they're worth, but these are projections of what 2021 is going to look like 2022, and 2023. Remarkably higher than of course, 2020, but even prior to that. And again, lots of different reasons for the earnings to be going up, but the economy is strong. So the likelihood of the economy losing steam is very low when looking at these charts here. So when people ask me, okay, well, inflation is going up, are you worried about that? Do you think I should make any changes to my portfolio? I say, no, but there's always that risk out there that something could happen and in this case the thing that could actually happen is the government.
If the government gets a little bit too over-anxious and sees these inflation numbers going up, they may start increasing interest rates. And when interest rates start going up, that's obviously good for you at the bank because you get a better interest rate on your money, but it's not so good for businesses and businesses are what drives the stock market. Businesses are borrowing money all the time. Reason being is that they're putting money into research and development. They're building factories, they're doing all sorts of things like that. So if the cost of borrowing goes up, they'll stop that type of research and development, and that ultimately will impact their earnings and therefore impact their stock price. So on the surface, the increase in inflation doesn't really upset me right now, but if the world economies and the world central banks actually start taking some corrective action, that could be the thing that kind of snowballs this thing into something bigger than what it really should be. So that's what I got for you this week, I hope you have a great weekend. I hope this was helpful and we will talk again next week. Thank you.
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