Inflation?

Chipotle announced they're increasing menu prices by 4% because of rising wages.[1] Likewise, Campbell's Soup is raising prices this summer due to higher costs.[2] According to AAA, gas prices at the pump have increased 48%. The price of lumber jumped more than 32% in the past year. And there is currently a shortage of everything from computer chips to potato chips.

The Consumer Price Index jumped in May, and it's up 4.93% for the past year – a hot number. The US Inflation Rate currently stands at 4.99%. The 107-year average inflation rate is 3.22%.

Despite the surge in CPI, inflation, gas, lumber, and burritos, the bond market signals a different story. If investors were anxious about inflation, interest rates would be rising, but this is not the case. The yield on the 10-year US Treasury Note is 1.53%, down from 1.74% in March. The 50-year average yield on the 10-year is 5.98%. Also, the yield on the 1-month US T-Bill is .01%, down 93% from last year!

The Federal Reserve said the current surge in inflation is transitory, resulting from the pent-up demand from COVID. Other words for transitory are brief, fleeting, or short-lived. I agree. I believe the surge in inflation will be transitory. If history is a guide, inflation spikes are ephemeral. If you traveled recently or dined in a restaurant, you know the economy is in full swing, but the pace will slow down at some point.

However, if you're concerned about inflation, here are a few things you can do today to protect your purchasing power.

• Buy stocks. If Chipotle raises prices, they'll make more money, and when they do, its stock price will rise. If you're a shareholder in Chipotle, you'll also profit. For example, the price of a Disney World Ticket in 1980 costs $7.50, today it's $109, an increase of 1,353%,[3] whereas Disney's stock price increased 18,850% during the same time frame. Stocks are an excellent tool for combating inflation.
• Buy real estate. Real estate prices have historically tracked the rate of inflation. Therefore, if inflation rises, real estate prices should follow.  
• Buy TIPS. Treasury Inflation-Protected Securities (TIPS) will pay you more income as inflation rises. TIP bonds are up more than 7% over the past year. Long-term bonds, by comparison, have fallen 9.5%.
• Buy commodities. Anything coming out of the ground can perform well in an inflationary environment. Commodities like oil, gold, silver, copper, wheat, soybeans, and sugar are short-term inflation hedges. For example, the Invesco DB Commodity Tracking ETF (          DBC) is up 57% over the past year, but it's down 21% for the past fifteen years. I'm not a fan of commodities because they don't perform well over time, but if you want to allocate a few dollars to this asset class, limit your purchase to 5% of your portfolio.
• Invest in a money market fund. The yield on a money market can rise if interest rates go higher but don't keep a large cash balance in a money market fund, checking account, or savings account because your purchasing power will fall over time. For example, a US postage stamp cost 10 cents in 1974, so you could buy ten stamps for a dollar. Today you can buy one stamp for one dollar.[4]

Don't fear a steady rise in inflation. It's healthy because it signals the economy is growing. A more significant concern is deflation, where prices fall as they did during the Great Depression. The moral of the story is to diversify your assets in stocks, bonds, and cash to take advantage of all market conditions.

There are two main drivers of asset class returns – inflation and growth. ~ Ray Dalio

June 10, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM's custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

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