By John de Goey, CFP, CIM

Special to the Financial Independence Hub

One thing that many economic historians often overlook is that one’s worldview is shaped by life experiences.  That includes matters like love, marriage and divorce, money and savings and attitudes toward political risk – to name a few.  If our values, likes and dislikes are shaped by our experiences, it stands to reason that our perceptions of what the future might hold could be largely informed by what we have already experienced.  That’s especially true of the things we experience in our formative years.

In the summer of 2021, for the first time in over a generation, there’s been some talk of inflation being a going concern.    Inflation was wrestled to the ground in the 1980s and hasn’t been heard from since – until now.  As the debate rages about the degree to which we should be concerned (if at all) about inflation coming back in a meaningful way, it is noteworthy that while there are credible economists on both sides of the debate, virtually everyone in the “inflation will be a problem” camp is at least 70 years old.  Stated differently, those people who experienced inflation in their adult lives are concerned and those who did not are not.

Transitory inflation?

For about 30 years now, the goal of central banks in the west has been one of price stability, which they define as inflation at 2%, give or take 1%.  Basically, anything between 1% and 3% is okay.  Now, we’ve experienced inflation above 3% for a couple of quarters and people naturally wonder what that might mean.  Central Bankers have been assuring us that the uptick is “transitory,” that it is just a situation where awful data from the early days of the COVID crisis is working its way through the system.  Nothing to see here.  Move along.

Although I am technically old enough to remember inflation, I never had to deal with it personally or directly.  I was a teenager when my parents built the family home on their property in 1979.  I heard about their astronomical, double-digit mortgage rates, but never had to experience anything of the sort as the payor.  My sense is that young people – especially millennials – cannot relate to anything close to what I’m about to say: the inflation rates, and therefore the mortgage rates and interest rates you have experienced throughout your entire lives, may not be around for much longer.  Furthermore, if that is true, the consequences could be enormous.

5% constitutes “Real inflation”

As mentioned, there are competing views on inflation.  I have not come down on either side, but I enjoy the exchange of ideas.  If the doves are right and the inflation we’re seeing now is little more than a passing phase, there’s not much to say because little will change.  If, however, real inflation is coming sooner than later and for longer than just a phase, we need to prepare.  What constitutes ‘real inflation’, you may ask.  My guess is something like 5%.  At that level, no one can pretend that the inflation rate is not a concern and does not need to be dealt with.  For this discussion to be meaningful, inflation needs to be at least 2% above the high end of the traditional range and to stay there for at least a year.  At that point, both the logic behind it being transitory and the facile dismissal of it being above the target by an inconsequential amount disappear.  At that level, something needs to give. Continue Reading…