June 4, 2021

Too Hot. Too Cold. Rarely Just Right.

You may have noticed a few things over Memorial Day weekend. First, it feels like everyone is, shall we say, unleashed. And second, everything costs a lot more than it did a year or two ago. If you were one of the tens of millions of Americans who drove somewhere last weekend, you likely noticed that gas prices have skyrocketed. Unlike some price shocks, however, this is not confined to oil. Everything — from your hotel room to your rental car to your new bike and the food you grilled — was likely substantially more expensive. It seems that prices have surged across the board.

And, with these price hikes come the scary headlines and new investment fears. Will inflation turn into hyperinflation, greatly diminishing the value of the dollar and, in general, bring the demise of our country?1

Before we answer that cliffhanger, let’s cover a few definitions.

  • Inflation – Inflation generally occurs all the time, except during certain recessions. It is common for the price of goods and services to rise a few percentage points each year. That is why it’s important to account for inflation in financial planning.
  • Hyperinflation – Very high, often accelerating inflation.
  • Disinflation – Still inflation, but declining. One-year inflation is 5%, the next 4%, for example.
  • Stagflation – Characterized by slow economic growth and relatively high unemployment, or economic stagnation, which is at the same time accompanied by rising prices (i.e., inflation). This normally occurs in a unique situation, such as when inflation is confined to one critical resource, like oil.
  • Deflation – When prices go down and trend lower. Sounds awesome. It’s not.
  • Transitory Inflation – This refers to inflation that is real, but temporary. Some recent examples include: a container ship that clogs the Suez Canal, blocking 10% of energy flows; a Russian hacker who takes down the Colonial Pipeline, disrupting flows to Eastern Seaboard; and a Texas freeze that takes 20% of U.S. energy production off-line. In these cases, the price spikes were drastic, but temporary.

Now that we’ve covered the basics, let’s get into the reality of our current situation and our expectations for the future. There is simply no way around the fact that we are currently experiencing high inflation. Nearly everything costs more than it did in recent years. Let’s look at some of the causes for this inflation:

Cause #1 – Americans Unleashed

We’ve been locked inside for a year, thanks to the COVID-19 pandemic, and now that we’re out, we’re making up for lost time. Everything we wanted to buy, we are buying. All of the trips we missed, we are booking, along with a few more for good measure. Those purchases we were putting off due to financial uncertainty, we’re making them now. The general feeling is, “Who knows what the future might bring? Let’s party now that we can!” In short, demand for everything from hotel rooms to dinner out has increased.2

Cause #2 – Logistical Issues

When we were all locked up in our homes during the pandemic, suppliers of everything from cars to laptops pulled back their production. Shipping containers that are normally always at the right place at the right time ended up stuck in various ports. In short, most things came to a screeching halt. We’re now discovering that we can’t just flip a switch to get things back to normal. It’s going to take time – maybe a few months, maybe a year or more, to ramp up production. Add to it the record-setting demand noted in the Americans Unleashed section above, and the supply chain is under stress.3

Cause #3 – Too Much Money

We have a lot… and I mean A LOT of money. It’s difficult to imagine the Federal Reserve’s printing presses being able to print dollar bills fast enough to keep up with the giveaways promised by our former and current presidents. Corporate bailouts? Check.4 Private business bailouts? Check. Stimulus checks for nearly everyone else? Check.4 And, just to add fuel to an already red-hot fire, the Federal Reserve has done all it can to keep interest rates very low, fueling a surge in demand for everything most people finance, from homes to cars.

Taken together, the three factors above have created a powerful inflation cocktail – an unleashing of pent-up demand, supply chain issues, lots of money and low interest rates. What could possibly go wrong? When it comes to identifying the type of inflation we are experiencing, most economists seem to be split into two camps:

Camp #1 – Transitory Inflation

Some economists have described the current period of inflation as “transitory” inflation. As noted previously, transitory inflation is inflation that eventually goes away.

Economists in this camp point to the fact that the current surge in demand will eventually subside and return to normal. The supply chain issues will eventually resolve, the cash hand-outs will eventually be spent, and the Federal Reserve will eventually raise rates. And voila, just like that, inflation will be back under control.

Camp #2 – Hyperinflation

Other economists argue that we are on the brink of hyperinflation. As also noted above, when inflation becomes “hyperinflation” (high inflation), prices are going up far more than normal. While it is historically normal for prices to increase by approximately 1% to 3.5% each year, it is not normal for them to rise by 10% to 15% per year.

Hyperinflation usually happens when there is a larger amount of money chasing the same amount of goods. For example, let’s say your neighbor’s daughter is selling lemonade and all the kids in the neighborhood have $1 from their allowance. The lemonade stand may make some sales at a dollar. Now, let’s assume the children’s parents decide to “stimulate” the neighborhood economy by increasing their allowance to $2. There is now twice as much money “chasing” the lemonade, and the price of lemonade will go up.

Economists concerned with hyperinflation agree that the supply chain problem will eventually work itself out, but that most of the other factors will persist. They are sounding the alarm that hyperinflation may be our destiny because it will become a self-fulfilling prophecy. If everyone believes there will be inflation, there will be.

For example, if we all believe that houses will cost more next month, we will pay more to purchase a home today. The same goes for a bike, a car or anything else. If everyone believes higher prices are inevitable, they will rush to buy goods today, regardless of price.

The persistence of high inflation has horrible effects on the economy because it erodes the purchasing power of a dollar. A dollar, in and of itself, is not worth anything other than what it can buy. For example, assume that $1 can buy a soda at a fast-food restaurant. If we experience 15% inflation, the restaurant will raise the price of the same soda by 15% to $1.15. Even though you still have the same dollar, it has lost its purchasing power and is no longer worth enough to cover the cost of a soda.

The last time America went through a hyperinflation cycle was from the mid-1970s to the early 1980s, when inflation ranged from 10% to nearly 15%.

Let’s Not Forget About Deflation

Not to throw a wrench into all this, but it wasn’t long ago that we were worried about deflation. Deflation is VERY scary.5 Deflation means the economy “deflates” due to falling prices. Deflation typically results from:

  1. Lack of demand, or
  2. Aggressive competition coupled with technological innovation.

With deflation, prices continue to go down. After the 2008 financial crisis, it took the United States nearly a decade to fight off deflation. Deflation can cause any economy to quickly collapse. Just ask our friends in Japan who took several decades to even modestly recover from their deflationary disaster.

In a deflationary economy, we all expect things to cost less a month from now or a year from now. In a deflationary environment, no one wants to buy a house today because they believe it will cost less once some time passes. In an environment like this, the economy slowly implodes as everyone hoards their cash, and spending comes to a halt. The Federal Reserve has very few tools that can solve this type of problem.

This is particularly scary because, as you may have heard, we have quite a pile of national debt. If we owe $30 trillion and are experiencing a period of deflation, we have a recipe for disaster. Not only do home prices, business prices and the cost of goods decline, but wages decline, as well. This results in less tax revenue to make payments on a growing debt. The math simply doesn’t work.6

Back to Inflation

Let’s pivot back to inflation. (So much ground to cover!) Many people decry the Federal Reserve’s “conspiracy” to devalue our currency. It’s not really a conspiracy, it’s actually part of the Federal Reserve’s mission statement! The Fed exists to do two things: ensure modest inflation and work toward full employment. In other words, it is working full time to create inflation. This is part of the reason every portfolio needs a growth-focused component. Cash simply isn’t going to work over the long term when the government is actively trying to make the dollar worth less every year.

The Federal Reserve’s top priority is to stabilize the economy, avoid deflation and get back to normal inflation. The United States favors inflation because we are largely a debtor nation.

Consider this example. Let’s pretend for a moment that the Unites States only has one asset, a $500,000 house. The United States, doing what it does best, keeps borrowing against the home, and today owes $600,000 on it. The bank is getting uneasy with this whole “owing more than you own” thing. There are a few ways out of this mess, but most make people very upset.

Option #1 – The United States could get disciplined and stop borrowing, instead making steady payments on its outstanding mortgage debt to get it under control.

Option #2 – The United States could spend less than it takes in from taxes.

Republicans and Democrats have largely passed on implementing a combination of those options. So, what’s the easy way out? Give everyone more money and lower interest rates. More money chasing the same number of houses drives up the price of houses. And lower interest rates makes it easier to pay more for a home. Just like that, the United States has a $700,000 house and owes $600,000 on it. We are currently witnessing this happening right before our eyes.

But what really happened? In reality, the house is the same, it just takes more dollars to buy it. So, by definition, our dollars are worth less than they were before the stimulus and the government can now better handle the debt. This is an example of the “hidden tax” at work!

Long-Term Implications

What’s the bottom line?7 We are currently experiencing higher inflation than normal. Some of this is transitory inflation. The supply chain will work itself out, supply will meet demand, part of the excess demand will subside, and the flood of money will eventually be absorbed back into the economy. This scenario makes hyperinflation unlikely, but inflation will likely persist. The Federal Reserve has a strong incentive to make sure that it does.

Over the long term, it will take significant effort to fight off deflation. The reality is that technology is driving down the cost of everything from TVs to laptops, and globalization is enabling corporations to find low-cost labor all over the world. These powerful economic forces are hard to overcome and will likely keep inflation in check.

In short, we now have high inflation, but part of that is transitory inflation, which will eventually ease and give way to disinflation (declining inflation), but likely not deflation. Phew!

So, what is an investor to do? The asset classes that perform the best in inflationary environments are stocks and real estate. Think of it this way: If every ingredient in a Chipotle burrito costs more, then Chipotle will charge more for the burrito. Ultimately, the stock price will reflect this increase. The same goes for a candy bar, a box of cereal, a car or a ticket to Disney World. Higher prices for consumers are ultimately reflected in the stock price.

The same goes for real estate. If the materials that go into building a home cost more, then a new home will cost more to buy. That makes all other homes worth more as well. This translates quickly into commercial real estate, as well – higher costs result in higher rents which result in higher prices.

What does poorly? Cash. Put simply, earning nothing on your cash while everything goes up in price means you are losing real purchasing power every year.8 Bonds don’t do well in this type of environment, either. If you collect 3.5% on a bond, and inflation is the same or higher, you are, at best, only treading water. Even worse, you may be losing ground.

The savvy investor holds stocks for the long run and bonds for the short run. Stocks will do their part to stay with or ahead of inflation, but bonds should be included to cover whatever income an investor may need over the next five to seven years.

Why bother with bonds if everyone is expecting inflation? There are two primary reasons:

1. “Everyone” is wrong all the time, so it’s always wise to be diversified.

2. Stuff happens. If we’ve learned anything since the beginning of 2020 it should be the importance of planning for the unexpected. If there is another pandemic, a major cyberattack, a terrorist attack or anything else that shuts the country down and causes us all to go back to cocooning, bonds will once again be king, and you will have to suffer through another article by yours truly on this topic (but with an emphasis on deflation).

Bonds give us a place to go, regardless of what is happening in the short term, and stocks give us a way to increase the probability that our money stays ahead of inflation over the long term.

The investments in your portfolio should match your needs. While the Federal Reserve’s top priority is to ensure some inflation, at Creative Planning, our top priority is simple – To ensure you are never, ever at the mercy of the markets. Your investments, now and always, should match your timeline and your needs, ensuring you are covered in the short term (regardless of what the world throws at us) and that the long-term purchasing power of your dollars remains intact.9


  1. I got heavy really fast.
  2. YOLO!!!
  3. On a scale of 1 to 10, the average American’s level of patience is a zero. Like Freddie Mercury sang, “I want it all, and I want it now!”
  4. It’s like being in Oprah’s audience during her surprise giveaways: “You get a car, and you get a car! Everyone gets a car!”
  5. Like Michael Myers from Halloween scary or pineapple on pizza scary.
  6. Our politicians are generally fans of math that doesn’t work.
  7. I can hear you whispering under your breath, “FINALLY!”
  8. Yes, I know I can be Captain Obvious sometimes.
  9. You made it through! Bless you!

This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.


Find out how Creative Planning can help you maximize your wealth.

Latest Articles

Ready to Get Started?

Meet with a wealth advisor near you to see if your money could be working harder for you. Receive a free, no-obligation consultation.


Prefer to discuss over the phone?