Commentary by Ryan C. Fuhrmann, CFA
In the business section of your newspaper, you might have caught some scary headlines about inflation. Some say we’re seeing the highest inflation rate in 39 years, or that inflation is “skyrocketing,” or “outrageous” right now. But is it really “out of control”?
High and persistent inflation would definitely do damage to your portfolio and could spell ruin for retirees on a fixed income. Inflation is the loss of purchasing power of your money. If inflation ran 10 percent annually, within 10 years the money in your bank account would be essentially worthless. Hyperinflation can destroy an economy within a short period of time.
Two camps are debating if high inflation is here to stay. You can count me in team transitory, which is to say high inflation is temporary and due to trying to shutter parts of the economy and stop coronavirus. The resulting supply disruptions have caused acute shortages in semiconductor chips (and the automobiles that increasingly rely on them), windows and related supplies to build homes, and even toilet paper (though that was more of a demand issue). Government spending is also out of control and is fanning the flames of inflation, but let’s not get started on that subject.
The Federal Reserve can raise interest rates to slow inflation. Former Federal Reserve Chair Paul Volcker did it in the 1980s. The “Fed” will likely raise rates this year. Short-term interest could soon return to 1 percent. This still isn’t much interest in a checking account (and still a negative real return), but it’s definitely better than close to 0 percent. The Fed recently stated: “Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation.”
I’ve been surprised that gold hasn’t rallied more because of inflation fears. It is traditionally known as an investment that can “hedge” inflation risk. It’s also known as fear hedge, or a haven investment in times of uncertainty. I recently talked to an individual who sold his business and wondered if he needed a tractor-trailer to purchase a half-million dollars in gold bullion. We did the math, and determined he’d only need a larger safe deposit box to house about 250 gold Krugerrrands. To me, gold is far superior to cryptocurrencies.
An even better place to park your money is in high-quality blue-chip stocks. These are global, well diversified and can pass along modest cost rises to customers. Apple, Nike and Verizon come to mind. Don’t worry about inflation – a modest amount is even good for the economy.