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Up, Up and Away

For those of you who were around in the late 1960’s you might remember the song “Up, Up and Away,” which was themed around riding on a hot air balloon.  The song has a light, airy feeling and is an example of “sunshine pop” which was popular at the time.  A large hot air balloon conjures images of something leaving the ground and floating high into the air.  Sound familiar?  As everyone is aware, this is what is going on with prices of just about everything right now – they are moving higher and seem to be headed into the stratosphere. 

Not surprisingly, the inflation data released last week showed a continuing momentum higher and marked the largest year over year change we have seen in 40 years.  Even the “core” inflation numbers, where food and energy are removed, were relatively high implying that costs of just about everything are rising, not just energy which has recently received the most attention. With energy prices pulling back over the past few weeks some economists are thinking we have now reached “peak” inflation and the pace of inflation will begin to subside.  Even if this is the case, inflation will remain elevated and near the highest levels seen in decades. We are not convinced this is what will happen since the Producer Price Index (PPI), which measures wholesale prices, rose by a whopping 11.2% compared to a year ago and notably higher than expectations.  These price increases are passed along to consumers, therefore we expect consumer price increases to continue, and possibly further accelerate, for at least the next few months.    

From a consumer perspective inflation is bad if income does not keep pace since purchasing power is eroded, but from a borrower’s perspective inflation can be good since the money that is being paid back is worth less than the money borrowed.  If the interest being charged on the borrowed money is equal to the rate of inflation it is basically a break-even proposition for both sides, but if the interest rate charged is less than the rate of inflation then the borrower is coming out ahead.  What is an example of a very large borrower who is paying a relatively small amount of interest and therefore is benefitting from high inflation?  The heavily indebted U.S. government may be the first one that comes to mind.  (If you want to learn more about the current state of government debt, you will want to hear David Walker speak. More about that later.)

“Sticky” Inflation

Hot air balloons eventually return back to the ground.  Prices generally do not return to where they were, unless there is deflation and the odds of that occurring anytime soon seem miniscule.  If prices move higher but inflation eventually subsides, prices tend to remain elevated from where they were previously and therefore “stick.”  Some price inflation is good since it reflects economic growth but when price increases are higher than wages and consumers’ incomes are unable to keep up with the cost of goods and services they purchase, then we could see slowing, if not stagnant, economic growth. 

The labor market remains robust and unemployment remains low, but data released from the Bureau of Labor Statistics indicates that wages are not keeping up with inflation. With wages adjusted for inflation, or “real” wages, falling and prices increasing, discretionary spending is likely to pullback also.  Consumer sentiment data released last week was higher than expected, showing that consumers are remaining resilient.  However, it should be noted there have been reports of an increase in consumer credit, meaning more people are using credit cards to make purchases and not immediately paying them off, presumably because they are unable to.

Consumer spending makes up nearly two-thirds of GDP, so a slowdown in spending would likely lead to a slowdown in economic growth, which in turn could lead to smaller or even stagnant wage growth and we enter a downward spiral.  On the other hand, some of the supply chain constraints are being caused by a lack of labor so if job openings are filled, the supply constraints could lessen, and we could potentially see an increase in economic growth.  As of now, it seems the former, not the latter, is more likely. 

Looking Ahead

Earnings season began last week and gets going in earnest this coming week. Expectations have been lowered slightly but earnings are still expected to show growth compared to last quarter and a year ago. Since earnings growth tends to drive the stock market there is hope for some market strength, but with lowered expectations it seems unlikely we will see a large move upwards.  Often times, companies report strong earnings but give lowered outlooks, causing stock prices to drop.  Expectations have already been lowered and the market has pulled back, so perhaps this has been priced into the market and positive surprises will provide a tailwind for stocks.  There remain many dark clouds hanging over the market so we are not as optimistic as we were a few months ago.  Hopefully we are wrong in our assessment and the next big move in the markets is to the upside. 

With relatively benign inflation over the past 20 years most investors have become complacent and now higher inflation is making many wonder how to combat it.  The recent stock market pullback does not help and we are likely to experience continued challenges in the markets during the months and years to come.  This is why we emphasize the importance of having a solid income plan in place during retirement which can weather all storms and keep up with inflation.  If you have not reviewed your income plan recently or do not have a steady plan in place, please contact us to discuss further before the inflation balloon floats away and out of reach. 

Have a great week!

Nathan Zeller, CFA, CFP®

Chief Investment Strategist
Secured Retirement

Please contact us if you would like to review your individual financial plan or learn how the TaxSmart™ Retirement Program can help you.   

Office phone # 952-460-3260

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Danielle Christensen


Danielle is dedicated to serving clients to achieve their retirement goals. As a Paraplanner, Danielle helps the advisors with the administrative side of preparing and documenting meetings. She is a graduate of the College of St. Benedict, with a degree in Business Administration and began working with Secured Retirement in May of 2023.

Danielle is a lifelong Minnesotan and currently resides in Farmington with her boyfriend and their senior rescue pittie/American Bulldog mix, Tukka.  In her free time, Danielle enjoys attending concerts and traveling. She is also an avid fan of the Minnesota Wild and loves to be at as many games as possible during the season!