Inflation

I just filled gas in my car and paid five dollars a gallon. This is an example of inflation!
 
But it’s not just gas prices that have gone up; food prices, housing prices, etc. all continue to rise. How concerned should we be that we’re going to see hyperinflation like we saw in the 70s? It’s a good question.

Why Are Prices Increasing 

Prices are increasing for a variety of reasons. The supply chain is still impacted by the Covid virus therefore there is a shortage of goods and materials; this is increasing prices. Energy prices have spiked up as OPEC has attempted to raise prices and shale oil production has yet to ramp up. Housing prices are going up based on the shortage of homes.
 
Most importantly, inflation is going up because the economy is beginning to jumpstart after being locked down for almost two years. This is a burst of inflation and something the Federal Reserve has talked about consistently as something that they expect. We do as well. 
 
Interestingly, both the Federal Reserve as well as other global monetary officials, are less concerned about current inflation and more concerned about economic headwinds in 2022. Their concern is that with global taxation rising, China’s economy struggling, and other headwind factors that impact economic growth, GDP numbers on a global basis will be challenging.
 
You probably see the mismatch here between that outlook and the current perspective that inflation is running rampant. It creates a situation which is perplexing to investors. This is not uncommon when we are moving between periods of economic downturn and economic growth.

DWM View 

It is our view that inflation is going to go up; it already has. But we agree with the bond markets perspective (see recent yields on the 10-year treasury) that inflation is likely more transitory and will moderate next year. There are factors off in the future that may be difficult to see right now that will blunt this current rapid increase in inflation. These factors are there and something we are focused on.

Portfolio Positioning 

It’s important to recognize that inflation will be rising even if it won’t go to the level that some people fear. For that reason, we have intentionally underweighted durations in fixed income portfolios in order to mitigate the impact of inflation on portfolio strategies. We think this is the right strategy as undoubtedly short-term inflation will rise. Still, on the long-term, over a one-year basis, we believe inflation will revert to more normalized levels as tax increases are implemented and the world starts to get back to some semblance of normal.
 
We’ve positioned portfolios where we think they need to be: shorter duration fixed income; reasonable credit quality; in many cases dividend paying stocks to provide yield for income and reinvestment; and assets that we think have long-term growth opportunities. We think this is the right way to invest in this current environment.

1970’s

Is it possible we will see the 1970s again?  I suppose so but we think it’s highly unlikely. That era’s economic disaster was caused almost completely by higher oil prices during a very difficult time between the United States and Middle East countries. With alternative energy on standby and shale oil a moderating influence, we don’t think OPEC is going to be able to control the global economy like they did 40 years ago.
 
We will continue to look at the data and monitor conditions. Our viewpoint is guided by information and our judgment based on that data. I can assure you, there is no shortage of data, and we are constantly assessing information as we make judgments about portfolios. I know you are relying on us to do just that.

Disclosures:

Destination Wealth Management constructs portfolios and investment objectives based on asset allocation principles coupled with tactical adjustments. The firm employs research analysts with significant experience to conduct asset and economic research. DWM allocation philosophy will adjust based on market conditions and economic environment. Allocations are not static and will adjust as needed. These strategies may not be suitable for all investors. For additional information and disclosures, please refer to Adviser’s Form ADV Part 2A.

Inflation is the rate at which the value of a currency is falling and, consequently, the general level of prices for goods and services is rising.