There has been a lot of talk about inflation lately.  Is it transitory or here to stay?  No one can say for sure, even the talking heads on TV.  However, you do need to understand the complete picture and how it can affect your purchasing power.  For folks entering retirement, inflation can be a big headwind especially if you are on a fixed income.  As an example:  If your retirement income stays level (let’s say an annuity or pension payout that doesn’t change) but your purchasing power erodes as the cost of everything rises, it means your retirement lifestyle will decline over time.

What can give you a better probability of maintaining your purchasing power?  Simply having some of your assets in vehicles that will also rise in value along with inflation.  Stocks tend to do well in moderate inflation environments, commodities can also do well (energy, agriculture) and finally precious metals may work as well.  What doesn’t work?  Cash.  Unfortunately holding large amounts of cash in an inflationary environment is the equivalent to losing money safely.  Yes it feels secure and safe, but what if something costs you $100 this year and $110 next year, and you only earned .4% on your cash, unfortunately you have gone backwards.

Having an emergency fund is great, but having your entire retirement account in cash isn’t.

With that said let’s look at recent data in the market to see if we can get a feel for whether the inflation surge is permanent or transitory:

Shipping:  All we are hearing is the massive increase in the cost of shipping right now.  However, like lumber in the Spring it sort of looks like we peaked on starting to come back down.  That’s good news:

Baltic Dry Index measures shipping costs

Shipping Costs for raw materials coming down

Baltic Dry Index

Container rates are also starting to pullback:

Shipping Container Costs

Container costs coming down.

 

And about that shortage in Semiconductors that ramped up auto prices?:

 

For now it seems like we may have peaked for a bit on many of the underlying inflation pressures.  Could they reassert themselves?  Of course, but for now we should see the inflation scare slowly recede for a bit.

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James A. Daniel

James A. Daniel - Financial Planner

CFP, CFA, CMT

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