Inflation seems to be the big topic of conversation both on TV but also in a few client meetings this week. I understand the concern. Inflation is a bull market killer, and the latest inflation numbers posted could have you looking for the nearest window.
Yes, inflation is bad, particularly for those you are on a fixed income. Essentially if you’re getting the same amount every month, you will be falling further behind, as your dollar won’t go as far as it did before. A lot of pensions and of course social security move up with inflation, so in essence you should not feel any different. Of course, we all know that inflation doesn’t affect everything the same. Some goods up, some go down, and some go up more than others. Inflation is the average of around 650 goods and services, so depending on your purchases, inflation will affect everyone differently.
Wage earners need to be conscious of their increase in pay through inflationary periods. A 3% yearly increase might sound great, however if inflation is more than that, then you will have less disposable money in your pocket each pay period.
Savers can be affected as the usual case is interest on checking accounts, never usually keeps up with inflation. There is normally a lag effect in any increase on any increase, and that, like the previous two scenarios leaves you behind the rest of the field.
Inflation does have a couple of winners. That’s those that owe money. The benjamins you borrow today will buy a lot more today than it will when you eventually pay it back. This however has a big if. If the business who has borrowed all the money can afford the additional borrowing costs. Some may have fixed their borrowing rates for a long time—others operate in a variable area.
Investors in equities (stocks) like you, can be positioned to benefit from inflation. If Mr. CEO operates his business well, he will try to maintain the same percentage of profit margin. He will adjust his price of goods to reflect the rising costs he has to pay and pass that onto the consumer. A 20% profit margin is $20 on $100 of sales but is $24 on $120 of sales. Those earnings flow through to the owners of the company.
Clear as mud, right? Let me give you a few talking points on inflation for the next time you’re at your local watering hole, grabbing a cold one and talking inflation.
- Inflation is bad for those on Fixed Incomes.
- Wage Earners need to ensure that their wage increases are at least keeping up with inflation.
- Those that borrow can benefit from inflation, as the funds they borrowed are now worth less.
- Equities (stocks) may just be your best defense against inflation.
- The best metaphor I’ve heard on inflation is it’s a transfer on money. From old to young. From savers to borrowers.
With that, here’s the buy/sell.
Let’s Go Red Eyes
My boys play for the State Championship on the weekend against our arch enemy the West Palm Beach Panthers (Rugby). Don’t worry I just coach these days and blow a whistle. The Panthers have had our number in the past 4 encounters, and it will be a big test for our guys to step up to the occasion. That said, they are in great shape and are starting to play some great patches of rugby. Should be a heck of a game.
This ends a six month stretch for me coaching Tuesdays and Thursday night, and either games or additional practices on Saturday. As much as I hate to see the season come to an end, it takes its toll, and I’m ready for nights at home eating with the tribe at our dinner table.
It has truly been a privilege to guide these young men (well some of them not that young), and I hope that they have got as much out of it as I have. Probably the sole benefit of getting old is that I get to pass on the “wisdom” I have obtained from the generation before, and watch it hopefully develop into something these guys will remember forever. I’ll keep you posted on the result.
Mick Graham, CPM®, AIF®
Branch Manager Raymond James
Financial Advisor Melbourne, FL
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Mick Graham and not necessarily those of Raymond James.