The TRUTH About Yesterday’s Inflation Fears
Let me ask you something… Is sugar bad for you?
How about carbs? I should eat as few calories as possible, right? If I want to stay fit, should I stick with a low fat diet?
No, I’m not considering a new fad diet today. I generally eat healthy, and I try to keep an active and healthy lifestyle, too. I think being healthy makes me a better dad, a more focused investor, and just a better all-around person.
But sometimes I get frustrated when I hear people throw out blanket advice like, “Don’t eat carbs,” or, “Such and such is bad for you.” After all, our bodies need sugar, carbohydrates, proteins, and even fat to operate.
The key is to focus on a healthy balance. Because too much of just about anything can be unhealthy. And at the same time, just about anything in moderation can be a good thing.
I’m thinking about this “health” example today as I look through the macro picture for our current market.
You see, we’re starting to see some signs of inflation in the U.S. economy right now. And if you saw the headlines in the mainstream media yesterday, you’ll probably get the message that “inflation is bad.” In fact, you might even be convinced that this is the “beginning of the end” when it comes to our current bull market.
I can hear the bears now…
“Inflation erodes the purchasing power of your savings!”
“If inflation picks up, the Fed will have to raise interest rates. And that’s bad!”
“Inflation killed economies like Zimbabwe. Pretty soon, we won’t be able to afford food!”
It’s kind of like saying, “My overweight uncle died of a heart attack, so I’m going to starve myself.”
So today, I want to take a look at our overall market, while paying specific attention to the balance in the market and how that balance actually indicates a healthy environment…
You’re probably familiar with this bad side of inflation, just like most people are familiar with the bad side of sugar.
If inflation rises too much, it makes it harder for people to pay for the items they need to buy. Prices for food, fuel, clothing, and other necessities rise during periods of inflation.
Too much of this inflation is obviously bad. You may have heard stories of situations like Zimbabwe where it took a whole wheelbarrow full of cash to buy a loaf of bread.
Now obviously that’s not healthy. But that’s not the type of inflation we have here in the U.S.
In fact, a reasonable amount of inflation is actually a healthy thing!
Inflation can make life easier for people who hold debt. And it can be a good thing for workers who are seeing their paychecks increase. And as you’ll see in a bit, inflation can actually lead to great situations for savers as well!
First let’s talk about people who hold debt.
For people who are in debt, a bump in inflation makes it a bit easier to pay back the money that is owed. That’s because inflation causes the value of a single dollar to drop. And over time, that decline in the value of a single dollar makes the amount of debt less meaningful.
For example, if you owed someone $10,000 a century ago, it would have be grounds for bankruptcy. But today, many people borrow that type of money all the time to remodel kitchens or to buy a car. The difference is inflation.
Inflation also corresponds with higher wages for workers.
For instance, if people are getting raises throughout the majority of the economy, companies will report higher inflation in wages paid. And with people having more money to spend, it will naturally cause prices for some things to move higher.
But it’s not actually a bad thing that people have more money to spend. It’s simply part of a growing economy.
In fact, it’s ironic to think that just a year or two ago, economists were worried that there wasn’t enough inflation and that low inflation might spell the end of the current bull market.
It’s really true that you can’t please all the people all the time…
Another effect of higher inflation is higher interest rates.
The Fed keeps a close eye on inflation data and if it looks like prices are moving higher, the Fed will respond with higher interest rates.
The idea here is to give savers an incentive to hold on to their cash rather than spend it all right away. And if people hold cash in savings accounts or other interest-bearing investments, that money won’t be spent on goods and services. Which helps keep prices from rising too fast.
It’s like a giant economic ecosystem!
Now, remember how I said inflation could actually be good for savers? Well, higher interest rates are specifically geared toward savers by helping them generate more income from the cash they’ve set aside over the years.
This is very important for retirees, many of whom have been hurt by years and years of exceptionally low interest rates. So today, savers are starting to have more options for investing the cash they’ve set aside for retirement. And that’s a GOOD thing!
So the next time you turn on the financial news and see inflation headlines scaring the market, just remember that inflation isn’t just the scary things that many headline writers make them out to be. And in fact, much of the inflation we’re seeing today is actually a good sign for your money.
Here’s to growing and protecting your wealth!