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Published On: June 1st, 2021

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Up, Up and Away

Investors’ latest fear: rampant inflation. Should we be worried–and what does it mean for our finances? Creative Planning’s Peter Mallouk and Jonathan Clements look at the evidence of higher inflation and consider the implications.

Hosted by Creative Planning Director of Financial Education, Jonathan Clements and President, Peter Mallouk this podcast takes a closer look into topics that affect investors. Included are in-depth discussions on financial planning issues, the economy and the markets. Plus, you won’t want to miss each of their monthly tips!

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Jonathan Clements: This is Jonathan Clements, Director of Financial Education for Creative Planning in Overland Park, Kansas. With me is Peter Mallouk, President of the firm, and we are Down the Middle. Today’s topic, Peter, inflation. If you go back to March of last year, when we were near the bottom of the stock market decline, investors were predicting inflation over the next five years of 0.1% a year. That was based on the difference between the yields on inflation index, treasury bonds, and today, barely 14 months later, investors are expecting inflation over the next five years of 2.6% a year. So what’s happened? What’s gone on in recent months? Well, investors have been fretting about inflation for years, but some of those worries have become much more widespread. People are worried about the level of federal government spending. They’re worried about loose Federal Reserve monetary policy. They’re worried about rising commodity prices. They’re worried about the pent-up demand from consumers as a result of the pandemic. And those fears focused in mid-May to a great degree when the Bureau of Labor Statistics announced inflation for the prior 12 months. That number was 4.2%, 4.2% for the past 12 months. That was the largest increase in a dozen years. So should we be worried? Well, the Federal Reserve doesn’t seem to be, at least at this point. I mean, they’re predicting that this year in core inflation, which excludes food and energy, we’ll run at just 2.2%. They’re saying 2% next year for inflation and 2.1% for 2023. And yet, it seems investors are worried. So, Peter, what is the worry? Is the worry just higher inflation? Is it hyperinflation? What are people saying to you?

Peter Mallouk: Well, let’s start with some definitions because I’m getting a lot of questions around what all these words mean because we’re hearing about transitory inflation, deflation, hyperinflation, stagflation. And really, what the government’s been worried about since 2008 is deflation. So you were talking about five, 10 years ago, this really all started in ’08 and ’09. Prices were going down. People would not buy a house for $400,000 because they thought a month later, it might be 390, and they wouldn’t buy it at 390 because they thought a little later it might be 380. It’s almost impossible to remember this in today’s world, but that’s how it was not that long ago. And we really had these great fears of becoming Japan. Deflation is a very, very scary thing because this psychology takes over. It’s hard to turn that around.

Jonathan: For investors, deflation is a much bigger problem than inflation.

Peter: Yeah, definitely. So deflation is a disaster, so the government is really interested in not having deflation. A lot of people talk about the Federal Reserve and having this conspiracy theory to create inflation. And that’s actually their mandate is to have a low unemployment and to create modest inflation. So they get up every day in the morning and say, “How do we create some inflation?” Because deflation is so bad. Now, inflation, we all know, and everyone gets that. That’s just prices going up. But we get concerned when they go up very fast, and we start to have images in our head of Venezuela and Greece and Lebanon and Nigeria, where it takes a barrel full of dollar bills to buy a piece of chicken. Because if there’s so much inflation, then the money itself becomes worthless. And this can also take on a psychological component. I think we’re seeing that right now. So we have a lot of different types of inflation happening now. One, we have real inflation. Things cost more today than they did a year ago. But they seem to cost more than we would normally expect, and I think that’s because of certain pressures that are on the system right now that are unique and finite and that are going to go away. So that’s what we call transitory inflation. So inflation that, yes, it’s here. It’s real, but it’s because of problems that are going to be solved. I’ll give you just a couple of recent examples. The Russians hack Colonial Pipeline, and there’s a sudden surge in the price of oil, transitory inflation. A shipping truck blocks the Suez Canal. Well, we know it’s going to eventually get unstuck. But in the meantime, we have some transitory inflation. What’s different here is we have countrywide transitory inflation. Why? Everyone’s been inside. It may as well have been a snow storm. We’re all inside, we can’t spend our money. And the government gives us more money, whether you’re a corporation, you got to bailout. You’re a private business, you got to forgivable PPP loan. You’re anyone else, you got a stimulus check. So when you’re inside, you can’t spend money. The government gives you more money. You come outside, you spend money. You go on more vacations. You buy bikes. You buy boats. There’s part of this that is transitory that eventually will get solved. The other part that’s transitory is we have supply chain issues. So when everyone wasn’t doing anything, corporations didn’t keep making stuff and shipping it. They just stopped. Containers wound up in the wrong parts of the world. Factories shut down. It takes them a while to create this stuff and get it to the right place so that the supply can meet the demand. So we know part of this is transitory, the debate is how much? And by the time the transitory part is gone, are we all psychologically so messed u