The Inflation MONSTER | Revealing how to improve your finances and lead a richer life.

The inflation monster is rampaging across the world! Why is this happening? What can you do? Financial planner Jack Martin discusses the topic and history of inflation.

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Inflation

Jack Martin: [00:00:00] In the U S in 1950 $1 could buy you four gallons of gas. That's four gallons of gas for $1, not $4 for one gallon of gas, it could buy you four books. So that's 25 cents a piece. Now I think they want about 25 bucks a piece. Could buy You two movie tickets. It could buy you a ticket to the major league baseball all-star game.

I think that last one might be the most surprising of all. So some of this is due to inflation. Some of it might be cultural changes, but I would describe the most of it to the inflation. So what is inflation? So I think, you know that it is a rise in prices of goods and services over time, but what is it that causes the.

Rising prices. So the most important thing that I want you to take from this show today, if anything [00:01:00] is to understand that the rise in prices over time, inflation is caused by an imbalance in supply and demand. So. A little bit of that is not a bad thing. And the government actually, the federal reserve actually has a target of a 2% inflation rate.

The reason for that is because it keeps the economy running smoothly, keeps the factories, humming, keeps the warehouses from backing up. You want to have a little bit more demand than you do supply. That's the fundamental reason that prices rise over time. As you have just a little bit more demand than you do supply keeps the economy running smoothly.

Everybody is fairly happy. It does make big price changes over time. True, but it keeps the economy running smoothly. So the government likes to have a little bit of inflation pressure. So what are the measures of inflation? So measures of inflation are the most common one you're going to hear on the news is going to be, what's called the [00:02:00] CPI consumer price index.

And CPI is a basket of goods, the components of which I'm going to give you right now. So components of that basket of goods that goes into the CPI are housing. 40% transportation, 22% food, 15%. Medical care, 7% education, 6% 10% on recreation, apparel, and other goods. The remainder of that. So couple other numbers you might hear occasionally are a core inflation that it excludes food and energy.

Pretty big. Thanks to exclude right now. PPI producer price, index producer price index is a little bit more of a leading indicator. Whereas CPI is definitely going to be a lagging indicator. So PPI is the numbers that producers of goods are seeing in the pipeline. So that can be a little bit more of a leading indicator for us.

And unfortunately, those are not [00:03:00] looking very good right now either. So that leads me to where do we stand right now? On Friday June 10th, 2022. The government had been expecting inflation to continue to moderate, but instead we got an annual rate that was announced that hit 8.6%, a 40 year high.

Yes. So parts of that that went into that or energy was up 34.6% groceries up 11.9, which was the biggest rise since 1979. Shelter five and a half percent inflation highest in the south at 9.2 and Midwest at 8.8 core prices. You remember you mentioning that a core inflation number, which excludes food and energy was up 6%.

And that was down slightly from the April number. So what [00:04:00] was the highest rate that we've ever seen here in the United States? I'm going to give you a quiz on that.

the highest number in the United States in the living memory of just about everybody here is 14.6% in 1980. So. Let's hope we're not headed to that because if we are, that was a society changer here in the United States. So just so you know, if we went a little bit back further in history we saw apparently 20 point 20.5% in 1917.

So that'd be the world war one era and 29% during the revolutionary war era. Take those numbers with a little bit of a grain of salt, because there's different reasons to be able to suspect of any numbers that are [00:05:00] older. The government does have ways of changing the way it measures things over time, for instance.

But those are, those are estimates and that gives you an idea, historical perspective on things as well.

So Americans are scared. The consumer sentiment index from the nearest city of Michigan, which is pretty closely followed by people in the economics field fell to a number of 50.2 from 58.4. That was a month earlier. And that is the lowest on record since it began in the 1940s. People are really scared.

The wall street journal and a June 10th editorial said quote energy and food prices made up much of the may increase, but this is cold comfort for consumers. Americans used to be able to substitute lower cost protein when beef prices rose, but everything in the supermarket has become more expensive in the past year.

Eggs 32% chicken, 16% milk, [00:06:00] 16% even soup, 14% lower wage workers are getting crushed by Bidenomics. And it goes on to say a historically tight labor market has pushed up nominal wages, but worker pay. Isn't keeping up with prices. Real average, hourly wages have fallen 3% over the last year with two thirds of that decline in the last four.

So what they're saying there, just so you know, when they talk about real average, hourly wages is they're saying that compared to the cost of living, even if you're getting increases it is still a net negative after you consider the cost of living compared to your wage increases. So that does lead me to one point, which is that I don't want you to necessarily believe, or at least at the very least be skeptical of what.

Politicians and the people hired by politicians are saying there's a few different reasons for that. Number one is they don't want you to panic. [00:07:00] And there's a few reasons that as well. One, they want to get reelected. Those who are running for office two. The psychology of inflation is

very significant in that you can get into a feedback loop in

which inflation kind of feeds upon itself. As people become more concerned that prices are going to rise. What do they do? What would you do? When you get your checks, if you know that something's going to cost you more in a week, what do you do?

You go out and you buy it right. Well, that just feeds into the inflation. And remember, that's creating more demand. You might've put it off for even a year or two, let's say, but instead you go and you buy it now. So that creates more of that demand that helps to fuel inflation. So they're trying to avoid having you do that.

And the other reason is that there's a real dark secret that I'm going to let you in on here now, which is that. Many politicians. And in fact, I could say all politicians [00:08:00] kind of have a conflict of interest in this regard. They actually like inflation. And one of the reasons is because of the fact that the tax revenues brought in by the government increased.

During inflationary periods, because inflation is generally based upon a percentage of a nominal number. Let's say your wages. Well, let's say you do get a decent size increase in your wages. You or may or may not be keeping up with inflation, but because taxes are based on that, number, they get more revenue to the government.

And the other thing to understand. It's something that we're going to be getting into, which is that one of the groups that makes out very well during an inflationary period is a debtor. If they've got debt that is based on a fixed rather than a variable number. So I'm going to give you another quiz here who is the world's largest debtor.[00:09:00]

Yeah. It's your uncle Sam. So the U S government is the world's largest debtor by far. Now, much of that is to our own people, but bear in mind. Debtors make out very well, typically in inflationary periods. And so there is that conflict of interest. So I always want you to be skeptical of, like I said, politicians and anybody hired by the politicians and that includes over the treasury department and the federal reserve.

So what are the reasons that we're seeing inflation many reasons actually, On the news, they tend to want to simplify things for political reasons, but I'm going to give you all this reasons and kind of what I think the, the balances are certainly the war in Ukraine in Russia. Affecting commodity prices.

Russia's one of the biggest [00:10:00] oil producers, Ukraine, one of the biggest grain producers along with other commodities as well. So that certainly affects things. The supply chain issues that we're having we still are being affected by COVID lock downs and China. We're seeing the reluctance of people to go back to work the great resignation.

He may have heard about that. People seemed to be very reluctant to go back to work like they were previously. Now some of that may be financial during the COVID lockdowns people, saving rates, jumped enormously. And for quite a while, they had that to fall back upon. Didn't feel like they needed to go back to work right away.

Some of it may be cultural. They if decided that maybe there is more to life than in a working as much as they are. So that's an issue One of the things that I think is important to understand is that we are seeing inflation rates elevated across the entire world. At this point, not just in the United States, domestically here in the news, the politicians on the left. want, to be able to say that it's just a global issue there by abdicating any responsibility for what has happened.

Politicians on the right one to say that it's just a domestic. And thereby be able to blame the current administration for the inflation issues. I will say that if you look at the numbers prior to the COVID pandemic, the United States was on the lower third of the inflation rates for developed countries worldwide.

And now we are very close to the top of the world for inflation rates amongst the develop. So that does one credibility to the idea that some of the things that have been done domestically have contributed to the inflation crisis that we're currently in. And some of that may be due in fact, to the amount of stimulus that the United States enacted for the size of our country per GDP, that's gross domestic product.

The United States was right near the top of the world. For stimulus.so let me give you an idea of the numbers. In January of 2020. So that would be right around the time of COVID starting the money supply as measured by what's called M2 was 15.4 trillion two years later, January of 2022, it was 21.6 trillion and increase of 40%.

So that goes to one of the reasons. You can get an increased in demand is that you have more money floating around in the economy. When you have more money chasing the same number or less number of goods, prices tend to rise.

The other thing that may be contributing to. Inflation is one that I've mentioned to you a few minutes ago, which was expectations. So the psychology that goes into inflation is that you become concerned when you see prices rising and that feeds upon itself and causes you to go out and [00:12:00] buy. Goods more quickly and it may get to the point where you start hoarding goods because you buy things in the expectation that there are going to be higher in price in the future.

Therefore you try and stock up. Let me give you a few examples of just how bad this can get to. So in 1922 to 23, the Weimer Republic in Germany after the defeat in world war II, Germany was saddled with debt and reparations and was having trouble being able to pay that back. They also had reduced production capabilities and they started producing large.

Currency. And at one point inflation reached 29500% per month. Workers were paid with suitcases filled with money, but the suitcase itself might be worth more than its contents. Hungary, 1945 to 46. Another [00:13:00] post-war issue. A post-war hungry after world war II dealt with supply shocks and production infrastructure issues.

And with saddled roof reparation payments to the Soviets and the government continued print money. And at one point there was a 100 quintillion Pango note. I don't even know how much quintillion is. And I hope I have no reason to ever find out at the peak of hyperinflation, their prices doubled every 15 hours then Venezuela more recent example they've continued to have inflationary rate issues and struggle with food shortages and blackouts.

An example that might be closer to home would be America. And the 1970s and early eighties, it reached a 14.6% in 1980, and basically changed the

culture in America [00:14:00] to the point where there was no longer an option for most people to have a single earner household, the two income household rose during that time period. In 1960, Dual income households were only 25% of the households. And now it's 60 plus percent. So very much a restructuring of society.

And we wouldn't necessarily call that hyperinflation. We would just call that high inflation, but anybody who lived through it knew how painful it was.

So who's going to benefit and who is going to be hurt from this. So, as I said, there are some groups that benefit from this number one would be the government. They benefit from the high interest rates due to the increased tax revenues that are going to be receiving debtors who have fixed rates on their debt will benefit because their debts will basically be inflated away.

Let me give you a, an extreme example here. So let's say we have.[00:15:00] Runaway inflation and voice and reaches thousands of percent. And you decide to pay off your mortgage. You've got $300,000 remaining on your mortgage and you can sell lemonade for a hundred thousand dollars a cup. Remember the examples that I was giving before, this is not as I'm giving an extreme example, but it's not an impossible example either.

So you go down this. Set up your lemonade stand. So a few cups of lemonade and for $300,000 and walk into the bank and pay off your mortgage with the equivalent of three cups of lemonade. So there are people who are going to benefit from this other groups that are going to benefit are those who hold physical assets.

Such as real estate who are involved in producing of raw materials, such as commodities [00:16:00] and oil. So those are, those are a few examples of people who will benefit, who will be hurt, probably people like you. So your. Wage increases for instance, are not likely to keep up. Let's say inflation, we already know it's running at 8.6%.

What are the chances that your boss is going to give you an 8.6% raises here for most of you? Very well. Most bosses are conditioned to giving 3% raises each year in the chances that you're going to get an 8.6% are not very high.

Other people who are going to be hurt our credit card, debtors, people who, are going to have a variable rates. And those rates are going to increase as the federal government in response to the inflation starts raising interest. Anybody who's got a variable rate mortgage, for instance, another big one that you could be hurt on very bad way.

So anybody who's got a [00:17:00] variable rate note of any sort that you're paying on, you're gonna wind up being hurt by that. So what to expect in the near future on this? I would say that one thing to bear in mind is that consumers may be finally fighting back on this. So. There were some earnings misses in may from Walmart and target and Abercrombie.

And it may have indicated that consumer serve reached their pain limit. And this is really a step that's needed to rectify this problem. So let me kind of walk you through what the steps are to fixing this from that perspective. And tell the consumer, the final end buyer is willing to say, no, I'm not going to pay that everybody along in the supply chain is going to continue to pass along price increases.

So what happens when the consumer says, finally, no, I'm not going to pay that. Well, Walmart and target and Abercrombie turned to their suppliers and they say, No, we're not going to pay that. [00:18:00] The Spire turns around to the manufacturer and they say, no, we're not going to pay that. The manufacturer then turns around to the producer of the raw materials and says, no, we're not going to pay that.

So it's going to take a while to move back up the food chain, the supply chain, but it's a necessary step and it's going to take awhile, but it's good news that we are actually seeing some sort of pushback from the consumer. It's very possible that we could be looking at a recession. Now, the federal government and the federal reserve treasury are trying to make it a soft landing.

But what they're telling you is not necessarily what's going to happen. We already know we've already seen that they are either wrong or misleading us. So one group of people to look at would be people who are knowledgeable, but not directly affiliated with current administration, such as Larry summers.

So where Larry Summers was a treasury [00:19:00] secretary under Clinton and director of economic council under Barack Obama. He said, I think there's certainly a risk of recession in the next. Somerset on CNN. And I'm quoting here I think given where we've gotten to, it's more likely than not that we'll have our session in the next two years.

Continuing on here with a quote summers has been outspoken in warning that president Joe Biden's economic policies are damaging the country in March 2021 summer's blasted Biden's 1.9 trillion America rescue plan as the least responsible macro economic policy we've had in the last 40 years and warned that it would set off inflationary pressures of a kind we have not seen in a generation.

Unquote, additionally, nearly seven out of 10 believe there will be a recession in the United States. And the next year, this is according to the financial times amid geopolitical tensions and soaring inflation.

Well, Janet Yellen of course, is [00:20:00] telling us a different story. She said recently, there's nothing to suggest that there's a recession in the works. She said during an interview at the New York times economic forum paul said in March, in my view, the probability of a recession where the next year is not particularly elevated. He said during his post-meeting press conference, that was in March in may. He told a different story. He said the question, whether or not we can execute a soft landing or not, it may actually depend on factors that we don't control.

All right. So I'm going to give you my perspective on this. The federal reserve is going to tighten the money supply in raise interest rates. We know that equity markets are pricing that in we're likely to see an economic slowdown, that's kind of the goal or a soft landing to be able to control the inflationary pressures.

Part of the issue though is the federal reserve has been behind the curve on [00:21:00] this issue. From the start and it's more likely to be painful than it would have been if they'd been more ahead of the curve on this. So what do you need to do here at this point?

I would say delay paying off debt that you may have. That's at a low to moderate fixed income rate. That's probably something you're not going to hear too often, any from any other revisers, but if the. Issue comes down to paying off that or paying off a variable rate.

You want to be paying off debt. That's at a variable rate because that rate's going to be going up, do pay off the floating rate and go to your employer and explain to them the situation about the inflation. But don't get your hopes up too much on that. their condition. As I told you to provide a 3% raise, they don't want to hear about an eight and a half percent raise, particularly when their costs for supplies are going up.

You've gotta be willing to [00:22:00] change jobs. The psychology is different. So an employer who's, let's say he's paying $40,000. And he's having trouble bringing people in at that $40,000 rate.

What's a 10% increase on that. Another $4,000. There's something different about the psychology on this. And they're willing to raise that. They're willing to pay $44,000 to bring people in, but they're not willing to give their current employees that same kind of. Just bear in mind. That's the psychology.

I think you'll find that on your own, but you've got to be willing to change jobs if needed, to be able to handle the situation, review your investments with your advisor. I would say you're looking for investments that are going to benefit from inflation. So some ideas on that would be physical assets such as real.

Now that doesn't mean you have to actually go out and buy a house. You could also use things like real estate investment trusts. What are also called REITs[00:23:00] companies with pricing power, such as monopolies commodity producers. You could actually invest in some of the stocks of companies that produce some of the things like metals oils.

Where they've got the ultimate pricing power. You want to take a look at things like gold. You're going to want to take a look at things like bonds that are specifically tied to inflation rates. And that would be examples like tips and I bonds, like I said, I'll probably have an episode coming up about that.

There are significant drawbacks to those. So we're going to need to take a look at those as well, but I think that basically covers it for today.

If you have some questions, you can go to richesrevealed.com there, you will also be able to see all my notes on this. All the links to my research articles this whole podcast was [00:24:00] extensively. Researched. And you may benefit if you're curious from being able to see those links and read some of those articles that I read as well.

And you can also leave me a question or a note there on that website, richesrevealed.com as well as leaving me an audio gram where you can actually have your questions read on the air. So till next time be one of the good ones.

Research Links

US Inflation in last 12 months

https://www.statista.com/statistics/273418/unadjusted-monthly-inflation-rate-in-the-us/

https://fredblog.stlouisfed.org/2021/01/whats-behind-the-recent-surge-in-the-m1-money-supply/

Covid stimulus by country

https://www.statista.com/statistics/1107572/covid-19-value-g20-stimulus-packages-share-gdp/

https://taxfoundation.org/us-covid19-fiscal-response/

Inflation by country

https://tradingeconomics.com/country-list/inflation-rate

https://www.ft.com/content/088d3368-bb8b-4ff3-9df7-a7680d4d81b2

Money supply

https://www.longtermtrends.net/m2-money-supply-vs-inflation/