Inflation can freak people out, so Josh and Austin are here to give you all the information you need to help give you peace when you start to see prices go up. They go through the metrics and the history of inflation, including what we can learn from looking at inflation in the past. They end by discussing if inflation is good or bad and the status of inflation in our current economy. Listen in now!
Main Talking Points
[1:21] – What is Inflation?
[5:10] – Inflation Metrics
[11:41] – History of Inflation
[20:06] – What to Learn From History
[21:32] – Is Inflation Good or Bad?
[26:35] – Things Driving Inflation Nowadays
[28:54] – Dad Joke of the Week
[30:34] – Closing Thoughts on Inflation
[34:42] – BONUS: Stock Draft Coming Up
Links & Resources
Why the Government Wants Inflation – The Everyday Advisor
Invest With Us – The Invested Dads
Free Guide: 8 Timeless Principles of Investing
Social Media
Full Transcript
Intro:
Welcome to The Invested Dads Podcast, simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments, here are your hosts, Josh Robb and Austin Wilson.
Austin Wilson:
All right. Hey, hey, hey welcome back to The Invested Dads Podcast, the podcast where we take you on a journey to better your financial future. Today, we are going to be talking about inflation.
Josh Robb:
Inflation, I get lightheaded every time I think about inflation. I just thinking about all the times I had to blow up the balloons for all my kids’ birthday parties. I do not like inflation.
Austin Wilson:
Okay. So it’s getting hot, right?
Josh Robb:
Yes, it’s warm outside.
Austin Wilson:
My wife sent me a picture that she’s at her parents, with our daughter playing in the little kiddie pool, which is inflatable.
Josh Robb:
Yep.
Austin Wilson:
And she’s like… Well, my air compressors broke at my house.
Josh Robb:
Oh, no.
Austin Wilson:
So she’s like, “Do we need to borrow my dad’s air compressor to do this?” And I was like, “Well, if you want to use it now, yes, because I haven’t fixed that.” So otherwise I would have been inflating an entire kiddie pool with my head.
Josh Robb:
Yes.
Austin Wilson:
And oh, that sounds like brain cells lost.
Josh Robb:
I have one that you can borrow, if you want.
Austin Wilson:
Yeah. Well, I appreciate that, Josh. You’re a good guy. So yeah.
Josh Robb:
We’re talking about hot air, so I can help you.
Austin Wilson:
Maybe we’ll just have you do it for me?
Josh Robb:
That’s right.
[1:21] – What is Inflation?
Austin Wilson:
So inflation, Josh.
Josh Robb:
Yes.
Austin Wilson:
It is the topic that everyone’s talking about.
Josh Robb:
Yep, you see on the news.
Austin Wilson:
It’s freaking people out. It’s all over the news. It seems like it could be the end of the world. Let’s just talk about it today.
Josh Robb:
Let’s start high level like you like to do.
Austin Wilson:
Oh 50,000 feet.
Josh Robb:
Way up there, way in the air. Give me the definition? What’s inflation.
Austin Wilson:
That’s right. So inflation, as defined by Investopedia, our friends, which don’t sponsor this show, but if they wanted to…
Josh Robb:
But you can Google it, you always can…
Austin Wilson:
They can reach out, we would totally talk to them. But inflation…
Josh Robb:
It’s a non-profit, that survives solely on everybody else putting their own stuff in.
Austin Wilson:
No, everyone just takes all the data off of their website and doesn’t ever give them credit. So, we’re at least giving them credit. So inflation is the decline of purchasing power of a given currency over time, a quantitative estimate of the rate at which the decline of purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time.
Josh Robb:
Okay, that was useless. So can you put that in normal Josh Robb terms please?
Austin Wilson:
So Josh, we’re living in Findlay.
Josh Robb:
Yep.
Austin Wilson:
It’s what we do. So what we do, you go to Fort Findlay Donuts.
Josh Robb:
Best place in the world.
Austin Wilson:
Best place in the world, and you get yourself a maple bacon fritter. It’s probably not your favorite, but it’s my favorite.
Josh Robb:
It’s a good donut.
Austin Wilson:
So you get yourself a maple bacon fritter, and it cost a dollar. Hypothetical, they’re a little bit more than that in real life. That donut costs you $1 today. Next year, on whatever day we’re recording this, plus one year, T plus 365, you go buy that same donut-
Josh Robb:
Same donut, same store.
Austin Wilson:
… same donut at the same store costs $1.10.
Josh Robb:
Oh man.
Austin Wilson:
So that 10 cents increase is well, that’s inflation. That’s what’s happening. It’s increase of price over the past year. And actually what that means, is that your $1 used to buy one donut. Now your $1 does not buy a whole donut. So that’s the decrease in purchasing power of that $1.
Josh Robb:
All right. So I got a little distracted there. When you mentioned donut, started daydreaming.
Austin Wilson:
Oh I would eat one right now.
Josh Robb:
So declining of purchasing power?
Austin Wilson:
Yeah.
Josh Robb:
Purchasing power? That sounds like a superhero. Is that one of the kids from Captain Planet? Is that right? You got earth, wind, fire, purchasing power?
Austin Wilson:
What is Captain planet. I’m a …
Josh Robb:
You don’t know captain planet?
Austin Wilson:
No, but-
Josh Robb:
Oh my goodness.
Austin Wilson:
… Earth, Wind and Fire was a band in the ’70s.
Josh Robb:
Yeah, each of these kids had a ring and they had an element, and when they all combined, they created Captain Planet.
Austin Wilson:
See, I’m not allowed to watch witchcraft like that.
Josh Robb:
It was the best. Although one kid had heart, which just seemed like a-
Austin Wilson:
That’s not a great superpower.
Josh Robb:
I mean what do you do with that?
Austin Wilson:
You’ve got heart kid-
Josh Robb:
Play with your heart.
Austin Wilson:
… you’ve got heart.
Josh Robb:
So purchasing, what is that?
Austin Wilson:
So in general, it’s just saying your dollar can’t buy that whole donut anymore. It’s not as powerful of a dollar as it used to be last year, and that’s what inflation is. So it makes you use more dollars to buy the same things over a certain period of time.
Josh Robb:
Okay.
Austin Wilson:
So the flip side of that, and I was going to mention, is deflation. So suppose, Josh, you go to the same donut shop, Fort Findlay, what up? And you go, you get your $1 maple bacon fritter, you enjoy it. It’s delicious. You get two sittings out of it, because those things are giant, and they’re really rich.
Josh Robb:
You might, but …
Austin Wilson:
But then you go back, T plus 365, 1 more year and it costs only 90 cents.
Josh Robb:
Oh boy.
Austin Wilson:
That’s a deal, right?
Josh Robb:
Yeah, good donut just cheaper.
Austin Wilson:
That’s actually called deflation. It’s a bit more rare, and it sounds great, but it’s actually usually due to a very unhealthy economy.
Josh Robb:
We experienced that. There’s probably other things going on causing prices to go down, not a good thing.
[5:10] – Inflation Metrics
Austin Wilson:
That is not at all a fear of what we were experiencing in the current 2021 world. So we’re not going to really talk much about that today. We’ll leave that for a later topic and Hey, it may happen one day. So we’ll be able to talk about it in real life. But right now we’re talking about in inflation. So let’s talk about some metrics, because I’m a nerdy, kind of numbers guy, right?
Josh Robb:
You like numbers.
Austin Wilson:
So inflation metrics, and I will point out that these are viewed both month over month and year over year. So you compare an increase versus last month, or you compare an increase versus last year at the same time. They’re also actually, generally published as a number pegged to a point in time, back in the day.
Josh Robb:
Okay, that’s the actual inflation number, it’s an ongoing moving, it had a starting point and it moves.
Austin Wilson:
But everyone really looks at the percent.
Josh Robb:
It translate to a percentage.
Austin Wilson:
Now everyone looks at the percent, but there is an underlying number that forms that percent.
Josh Robb:
Interesting.
Austin Wilson:
So first up is the consumer price index.
Josh Robb:
All right.
Austin Wilson:
And the consumer price index-
Josh Robb:
CPI.
Austin Wilson:
CPI. So yeah, everyone, you hear CPI on the news or whatever, consumer price index, think that.
Josh Robb:
That’s the, those shows where there’s a crime and then they go there and they solve it with all the forensics.
Austin Wilson:
Is that still going on. Because they had seven spinoffs, CSI, different towns, every town, like Findlay CSI. That was a show, I’m sure, because every single town had one.
Josh Robb:
Big or small, it didn’t matter.
Austin Wilson:
It didn’t even matter. So yeah.
Josh Robb:
Cow-tipping, who did it?
Austin Wilson:
Who done it? So that was established, CPI is established by the bureau of labor statistics, also known as the BLS. And this measure of inflation is calculated by establishing the price of a basket of goods, like we talked about earlier, and services with various weightings to represent what an average consumer spends in a given month. So this includes food, gas, housing, healthcare, et cetera. And it’s viewed as the cost to consumers. Notably it excludes any costs that the consumer does not pay. So certain benefits that an employer would pay, that technically are assigned to that consumer, are not included in this. And that’s, we’ll talk about that in a little bit. So as prices for these goods increase, the index level increases. Then that shows a percentage change in the cost of living. This is the preferred inflation gauge for most people, most businesses, and most entities. It’s very widely available, it’s very utilized.
Josh Robb:
It’s a basket of goods.
Austin Wilson:
Basket of goods.
Josh Robb:
In a sense of, let’s say, they said, “Hey, Josh Robb, we’re going to use you as a way of seeing what inflation is. When you go to the story each month, just give me your total, your little receipt of everything you’re buying and gas station, everywhere you go. And then we’ll see how much it changes month to month, because you’re a very consistent person. You buy the same things all the time.” Because it’s just this basket of stuff.
Austin Wilson:
Yeah.
Josh Robb:
Every month? Gotcha.
Austin Wilson:
Yeah. So it’s going to have, “Hey, this is how much you spend on your house. This is how much you spend on your groceries. This is how much you spend on fuel and healthcare and utilities and yada, yada.”
Josh Robb:
Okay.
Austin Wilson:
Those are all in there. So there’s two sub categories of CPI. And there’s actually two ways to look at inflation in general, and those are headline, and the headline inflation is the one way of viewing it that takes the, it takes into consideration all of the price changes for all of the baskets, or all of the goods in the basket of goods in the calculation. So everything goes in, nothing’s excluded. Another one and more commonly used, in terms of smoothing out some of those big swings, is what’s called core. Core takes out what’s generally most volatile, and that is food. Food costs go up, food costs go down. They’re related to commodities, right? Same with energy, so whether that be fuel or utility costs, some of those utility costs are that way as well, because those can go up and down regardless of the rest of the goods. So if you strip out those, you get a lot less volatility and that would be what’s called core CPI in this case.
Josh Robb:
And that’s how they say it. So if they’re talking about inflation, they may say core CPI, or headline CPI, that’s the one you know what they’re talking about.
Austin Wilson:
Exactly.
Josh Robb:
So core is without food and energy? Headline is everything?
Austin Wilson:
Yes.
Josh Robb:
Gotcha.
Austin Wilson:
So on the flip side, another way to look at this, is what’s called Personal Consumption Expenditures.
Josh Robb:
PCE.
Austin Wilson:
It is PCE, yes. So this index is calculated by the Bureau Of Economic Analysis, and it is similar in many ways to CPI, but it does not, or it does track, thanks for correcting myself.
Josh Robb:
Yes.
Austin Wilson:
Because it’s a key differentiator.
Josh Robb:
Very important.
Austin Wilson:
It does track expenditures made on behalf of consumers by employers. So there are also various weighting and formula differences that go in, that are a little bit different, but mainly the expenditures made on behalf of the consumers by employers, is what causes a material difference in CPI versus PCE. Because on paper, you’d think they should be the same, right? They’re not the same.
Josh Robb:
It’s a different basket of goods, different weighting.
Austin Wilson:
It’s a little bit different basket of goods, a little different weighting. And obviously yeah, the employer piece of that, it changes things significantly there. They do generally move in the same direction, but not to the same magnitude, and not always at the exact same time. But I will note that this is the most … So I said pretty much everyone uses a CPI? CPI is the generally accepted inflation term, but ironically the one, the group of people that care about inflation more than anyone in the world, is the Federal Reserve, and they use PCE.
Josh Robb:
You know why?
Austin Wilson:
Well, there’s a lot of reasons why. Do you have a joke about it?
Josh Robb:
No, I just, in general they just want to make things difficult.
Austin Wilson:
Well, yeah, it’s a government entity.
Josh Robb:
They say, “everybody agrees to this-
Austin Wilson:
CPI is great.
Josh Robb:
… let’s go the other route. What’s this? The rest of the world uses metrics system? Guess what? No, we’re not.”
Austin Wilson:
No.
Josh Robb:
That’s what we do here.
Austin Wilson:
It’s like, that’s why we still use the normal, inches and feet-
Josh Robb:
Normal? You call it normal…
Austin Wilson:
The rest of the world used metric system.
Josh Robb:
… metric, and we’re like, “We’ll do the Imperial system.”
Austin Wilson:
If we really had our act together, we’d be metric by now. So anyway-
Josh Robb:
That’s a whole other topic-
Austin Wilson:
That’s a whole other topic for another day. I will also point out, this is also used in both headline and core versions.
Josh Robb:
They do the same thing?
Austin Wilson:
They do the same split, and they take out food and energy for their core as well. And what the Fed uses to base policy changes, is generally Core.
Josh Robb:
Yeah, and the main reason they do that, is it’s less volatile, because the PCE tends to not have as much swings. So, I was kind of joking they just like to make things difficult. But they want a smoother metric, because if they’re making policy decisions, they don’t want like, “We’ve solved this month and we’ll get to it, but there was a big jump in inflation. It’s up to 4.2%. That’s a big jump.”
Austin Wilson:
That was headline.
Josh Robb:
Yeah, and that’s a big move. If they’re making policy decisions, you go from 1.8 to 4.2 or whatever it was, that’s a big move. You want something a little smoother to make those longer-term policy decision.
[11:41] – History of Inflation
Austin Wilson:
Yes. So I want to get a little bit more nerdy.
Josh Robb:
Oh man.
Austin Wilson:
Because this is just what I feel like doing today, Josh. So let’s talk about some historical periods in general, and how inflation impacted stocks and bonds. So I have a number of different scenarios that we’ll talk through, but I also wanted to point out that the highest inflation on record. So, but take it with a grain of salt, because data was really hard to come by back then, was in 1778, 2 years after America was founded. It was reported to be an increase of 29.78% year over year. So about 30% increase in inflation in one year. Then CPI data that we had just talked about, that started becoming readily available in 1913. Since that, which is a little over 100 years, the highest that we saw was 19.66% in 1917.
It’s also good to point out that there were several periods of double digit inflation, from the founding of our country all the way up to 1913. And it was in 1913 that the Federal Reserve was created, with one of their pillars as a goal to moderate inflation. The other is full employment, but that’s not really what we’re talking about the day they do interact and work together.
Josh Robb:
That’s what the fed…
Austin Wilson:
But that is the, they’re two mandates there. So yeah, it’s crazy. Those numbers like-
Josh Robb:
Can you imagine 20%?
Austin Wilson:
Really, your dollar is 30% weaker. The donut would cost a $1.30 in one year. You would cut back on donuts, no, you would not cut back on donuts. You’d cut back on-
Josh Robb:
Clothes?
Austin Wilson:
Clothes or something, sell your house?
Josh Robb:
I would go barefoot to eat my donut.
Austin Wilson:
Crocs are pretty much barefoot, Josh.
Josh Robb:
Oh, they’re the best.
Austin Wilson:
Their stock is the best.
Josh Robb:
Apparently.
Austin Wilson:
That’s not a recommendation by the way. That’s just looking at their chart.
Josh Robb:
Just noting that they moved the positive direction-
Austin Wilson:
Yeah, exactly.
Josh Robb:
… because they’re coming back in style.
Austin Wilson:
Josh, they were never in style.
Josh Robb:
They were never left out of style.
Austin Wilson:
Oh man, let’s just leave that.
Josh Robb:
You’ve got two modes. You’ve got casual mode and engaged mode.
Austin Wilson:
It’s the mullet of shoes.
Josh Robb:
Oh man, they’re so nice. You don’t even know.
Austin Wilson:
So, okay. Time period numbers, noting that these are not annualized numbers. These are-
Josh Robb:
This is a total for the time period?
Austin Wilson:
… total numbers over the time period that I refer to. So from 1976 to 1979, we were in the middle of an oil crisis, lots going on in the country. Inflation, so we’re using CPI here and we’re using the index of CPI. So not percentage change, the actual index. So CPI inflation, increased 28% over that three-year period.
Josh Robb:
Wow.
Austin Wilson:
28%, that’s a lot in three years.
Josh Robb:
Yep.
Austin Wilson:
Stocks over the same time, and we’re using the price return of the S&P 500, they were up 20% over that same time period. And bonds, so we’re using the US Aggregate Bond Index, over that time, it was up 21%.
Josh Robb:
Okay.
Austin Wilson:
So really high inflation-
Josh Robb:
But the market follows suite with it.
Austin Wilson:
But the market seemed to be relatively moving in the same direction. But with inflation being that high, yeah, you got the same returns across the board, not too different. So let’s look at the ’80s.
Josh Robb:
’80s were a good decade.
Austin Wilson:
The ’80s were a period of good economic growth, a period where Josh was born. Good times. Yes, just me. There was still substantial inflation.
Josh Robb:
Yeah, this is a decade we’re looking at…
Austin Wilson:
We’re looking at, we’re looking at a whole decade, and during the ’80s, inflation totaled 64%.
Josh Robb:
Seems high.
Austin Wilson:
So from, yeah, from 12/31, 1979 to 12/31, 1989, your dollar devalued by 64% essentially. Okay. However, stocks over the same time period returned 227%. So your stocks not only kept up with inflation, but they-
Josh Robb:
Destroyed it?
Austin Wilson:
… destroyed it. Bonds, now this is a period where inflation was higher, interest rates were a lot higher-
Josh Robb:
But moving down?
Austin Wilson:
… but moving down. Yeah, so interest rates moving down, sends bonds up, due to the relationship they have there. Bonds returned 223% in the decade.
Josh Robb:
So really between the two-
Austin Wilson:
About the same.
Josh Robb:
… you didn’t get much for the increased volatility of stocks during that decade-
Austin Wilson:
Correct.
Josh Robb:
… bonds returned about the same. And when you look at their yield or their return, based on the risk you’re taking, they actually probably had a better sharp ratio, or a return?
Austin Wilson:
Yes, the volatility was a lot lower.
Josh Robb:
So crazy.
Austin Wilson:
Now this was a time when everyone was really happy to be in a 60/40 portfolio.
Josh Robb:
Yeah, getting return on both of your holdings.
Austin Wilson:
Everything’s doing great all the time. So let’s flip forward to the ’90s, my favorite decade.
Josh Robb:
Good time for you.
Austin Wilson:
My favorite decade.
Josh Robb:
Austin was born in the ’90s.
Austin Wilson:
There were some great times. Early, really early.
Josh Robb:
Early ’90s. Sure.
Austin Wilson:
So inflation throughout the ’90s cooled quite a bit. Inflation only was 33% for the entire decade.
Josh Robb:
For the whole decade? Yep.
Austin Wilson:
So that’s half of what it was in the ’80s. People were less excited, because Josh was already born-
Josh Robb:
Oh sorry.
Austin Wilson:
… and he was a kid-
Josh Robb:
Getting into my teens, into my double digits.
Austin Wilson:
… getting into a trouble. Yep. So yeah, inflation only 33% stocks on the other hand rocketed. Through the end of 1999, the S&P 500 was up 346%. Now towards the end of that decade, we were in the beginning-
Josh Robb:
.com.
Austin Wilson:
Yeah, the.com bubble. But they had done very well. Bonds only returned 112% during that time.
Josh Robb:
Only? That’s still pretty good.
Austin Wilson:
A lot of, that is pretty good. But you will note, that the trend is not working in bonds’ favor in terms of total return, because we’ve been on a long-term interest rate decrease really, since the ’70s, ’70s and ’80s.
Josh Robb:
40 years, we really had a 40 year…
Austin Wilson:
Bond, yeah, bonds have not been going the right way in terms of interest rates. Though a lot of that’s due to economic growth, changes, assumptions for the country and stuff like that. So flip forward to, we’re going to go a little bit shorter period here, 2000, so 12/31/99 through ’07. So I’m conveniently stopping it in ’07. This is the tech bubble. This is the subsequent recovery after that. Leading up to, but not going into yet, the global financial crisis. So inflation over seven year period was 25% total cumulative.
Josh Robb:
So it seems a little higher than the ’90s, because-
Austin Wilson:
It does.
Josh Robb:
… because the total was 33-
Austin Wilson:
And that’s a shorter time period.
Josh Robb:
Yeah, that’s what I’m saying. So probably a little higher average, but yeah.
Austin Wilson:
Stocks because of that tech bubble bursting in the early 2000s, for that seven year period, had returned negative 1%. Now that is price return only. They were positive with dividends.
Josh Robb:
It did not breakeven then.
Austin Wilson:
Bonds on the other hand were up 66%.
Josh Robb:
Volatility, a lot of times bonds tend to do better.
Austin Wilson:
Bonds do better during volatility. Interest rates also continued to come down as the economy weakened during that time. All right. So let’s look at what everyone is thinking about the global financial crisis, 2008, 2010. So you’re getting the beginning and then-
Josh Robb:
All the way through…
Austin Wilson:
… right into the recovery, but not quite in, not that far into it. Inflation was only 4% for that really three-ish year period.
Josh Robb:
So pretty low?
Austin Wilson:
Total, so nothing, 1% a year-ish.
Josh Robb:
Yeah, very low.
Austin Wilson:
Stocks were down 14% over the time period. Now there was a huge sell off in the middle, but that captures most of it. Bonds were up 19%, rates continued to drop, which meant bonds did well again. Okay, so 2011 to 2019, conveniently stopping that at 2019, inflation-
Josh Robb:
Did something happen in 2020?
Austin Wilson:
Yeah, we’ll get there. Don’t burst, don’t ruin anyone’s assumptions yet.
Josh Robb:
Okay.
Austin Wilson:
We don’t know what happened in 2020, 2011 to 2019 inflation totaled 17 total percent. So we’re weak for about a decade. That’s a whole decade, only 17%. Stocks were up 157%, that’s a lot. Bonds were up, but they were only up 36%. And rates continued to decline, is really what caused that. Okay, it’s really until the end of that, when the Fed started hiking towards the end. So then 2020 happened, there was kind of a pandemic. We’re on the outer edge of that, coming out now, 2020 happened. So let’s look at 2020 through to today. Inflation has only been, so it’s been about a year in change, 4%. So that’s a little high, but that’s 4%, one-ish year. Stocks have returned 29%-
Josh Robb:
Not bad.
Austin Wilson:
… and bonds have returned 5%.
Josh Robb:
Not much.
[20:06] – What to Learn From History
Austin Wilson:
So let’s talk about what we can learn from this. So when inflation is high, people are less optimistic about the future of the economy, and therefore they buy bonds because they’re less risky than stocks. So this will send bond prices up and stocks down, because they’re selling stocks to buy bonds. Or at least bonds would be up more than stocks, or stocks will be up less than bonds. When inflation is low, people tend to buy stocks and sell bonds, which makes stocks tend to outperform.
And we’ve been, I guess, probably in an overarching note, in a really low inflation environment since really the mid-’80s, but really since the ’90s, we’ve seen hardly any measurable inflation. So consequently, interest rates have continued to be low, and have gone generally lower throughout that whole 40 year period. As we’ve talked about before, low rates are also more favorable for stocks than bonds. That’s been a tailwind for stocks. That’s why stocks have done a lot more outperforming in the last 20 years than they did periods before that.
[21:32] – Is Inflation Good or Bad?
Josh Robb:
All right. So that’s a lot of statistics, the long-term average is just under three and a half percent. If we go back further, back to World War II, you’re averaging about three and a half percent just under, but about three and a half percent per year, that includes the highs and lows. So we’ve talked about what the Fed is trying to do. So is inflation good or bad? I think you and I have our thoughts on that. I’ll start, just so inflation is good in that it’s the growth of our economy. When prices are going up, it’s a symbol or a result of the growth of our economic overall stability and improvement. Increasing, if we get better at things and we have more, that’s where inflation comes in-
Austin Wilson:
People are making more money and spending more money. And, Yep.
Josh Robb:
So inflation, in and of itself, is not an evil thing. It’s just the end-result of growth. And so for a good healthy economy, you should see some inflation. High inflation, not so good. Deflation, not so good, but inflation in general, is a result of a growing economy?
Austin Wilson:
Yeah, I think that if you think about the long-term average of our economy, the growth of it, I think now that we’re a more mature economy, it’s roughly in the three-ish percent range. If you’re in the inflation range of that, you’re probably at a really healthy-
Josh Robb:
Go along with it.
Austin Wilson:
… a healthy clip. You can, it’s not too out of way, either way. The Fed has a mandate, now they’ve just recently revised it, but they want to see an average over a period of time-
Josh Robb:
Which they won’t tell you what a period of time is.
Austin Wilson:
Yeah, they can adjust it, however it fits their mandate at that time. They want to see an average of about 2% of core PCE. So taking out food and energy-
Josh Robb:
If you need to, rewind back when Austin explained what core PCE is.
Austin Wilson:
Exactly.
Josh Robb:
So that’s the more stable, and it’s excluding food and energy. Because they’re looking at a very stable, they want to see that average 2%.
Austin Wilson:
So that’s what the Fed wants to see. They will let inflation run hot to bring up the average, because we’ve run cool below that for a long time.
Josh Robb:
Yeah, that’s for a while.
Austin Wilson:
So they will let it run hot above that, until the average gets to there, and then they’ll start thinking about tapering off bond purchases and increasing interest rates. But that’s how they’re going to slow growth and slow inflation. That’s really the lever that they pull, two levers really. Also good to know that inflation is actually, some level of inflation, good for the government. People will then pay more in taxes, because they’re earning more money. They’re going to pay more in taxes locally and statewide, because of sales tax being up, because inflation is taking hold. That takes some pressure off of the debt, the interest payments on debt for a government, whether that be a state, a local or the national, the federal government. Now that really only works, if you keep your spending relatively in line. However that, on either side of the aisle, really has not been the case in a long, long time. So-
Josh Robb:
To explain that, so let’s put it in our terms. So let’s say I make $100,000 a year. That’s my income. Okay, and I have debt of $130,000. I used those two for a reason, because our debt to GDP, as a nation, is about 130% of what we bring in each year.
Austin Wilson:
Good example.
Josh Robb:
So it, but it’s really easy to understand, if you think of this way. So I earn $100,000 a year. That’s my income I owe, or I make $100,000 a year. I owe $130,000 a year. If I’m able to keep my debt the same. So I pay my interest, but I don’t pay anything off, because I work hard, I get an increase in salary and I move and, oh great, now a couple of years down the road, I’m making $150,000 a year, and my debt has stayed the same at 130, it’s less of a burden for me. Like you said, that’s what inflation does, is I increased my income. So my burden, my debt load became less. As long as I keep it custom. Now, if I make the hunt make 100,000, and my debt’s 130, and then five years down the road, I make 150, and my debt is 200, the inflation didn’t help me at all-
Austin Wilson:
Right, exactly.
Josh Robb:
Because I increased the spending as well. So, that’s what you-
Austin Wilson:
Yeah, that’s the modern monetary theory, another episode plug someday. That’s the world we live in right now, where we are increasing, we’re obviously increasing federal spending, and debt therefore more than we’re increasing taxes. So inflation will even, we see a period of inflation, it will help. It will not close, the gap will not close, unless the spending comes down as well.
Josh Robb:
We saw that coming out of World War Two. We had a very high debt burden after World War Two. So coming out of World War Two, we saw a very robust economy, which enabled us to grow out of the heavy debt burden, which was huge, helped us out. And there was a lot, because we had the great depression before World War II. So there was a worry that after the war ended, which boosted all of our spending, when that went away, we’d fall back into the great depression, but we didn’t, because the economy grew out of it.
[26:35] – Things Driving Inflation Nowadays
Austin Wilson:
Yeah, our debt to GDP level was the record it had ever been in World War Two until now. There’s not even a war. Oh, so interesting. That’s another topic for another day. So let’s talk about what’s going on now.
Josh Robb:
Okay.
Austin Wilson:
Josh.
Josh Robb:
What is going on now?
Austin Wilson:
A lot. Let’s just say that. But when we’re, when it comes to inflation, there are a lot of things driving inflation. So we’ve had trillions of dollars of fiscal stimulus. And whether that be potential infrastructure spending, direct payments to people, payroll protection, yada yada, yada. We’ve had episodes about all of that stuff in the past, but trillions of dollars out there that weren’t out there before. Super easy monetary policy. So the Federal Reserve has interest rates at zero, and they’re buying a bunch of bonds in the fixed income market, really putting a lot of liquidity and cash out there. So there are a lot of things that are moving towards increasing inflation, because of the dollars that are out there. More dollars means more inflation.
Josh Robb:
Yeah, more spending more-
Austin Wilson:
Exactly.
Josh Robb:
… more demand, less supply, prices go up. Prices go up, it means inflation.
Austin Wilson:
So let’s look at numbers. In April, which is the number everyone’s talking about.
Josh Robb:
April.
Austin Wilson:
April, we had core, this is the core, this is not headline. Core CPI was 2.96% year over year, so about 3%. For a core number that’s really high. For a headline number, it was like four and change. Core PCE was 1.83%, and I think that lags about a month or so. So that’ll probably pick up again year over year. So I think it’s good to know, that we can take those numbers with a grain of salt as well, because those numbers are comparing April to April, 2020, which was-
Josh Robb:
April 2020 was rough.
Austin Wilson:
… the bottom of the economic shutdown and everything. So those numbers, the Federal Reserve keeps using the word, “Transitory,” when it comes to inflation. And they are insisting, through this point, that that big spike we saw in April, and we’re probably going to see some in May and June, and maybe even July, those bigger few month numbers are really just right-sizing some of the numbers that were really low last year. We’re making up some ground, and it’s not necessarily new inflation. It’s just making up ground.
Josh Robb:
Yeah.
Austin Wilson:
So as long as inflation remains “Transitory,” the Federal Reserve is going to be happy to let it roll, as long as that average does not get above that 2% core PCE target.
[28:54] – Dad Joke of the Week
Josh Robb:
Now, Austin, you got really excited about this topic for whatever reason. I don’t even know. You got so excited, we just blew right through my dad joke.
Austin Wilson:
Oh man.
Josh Robb:
I mean, we haven’t had a dad joke, and you’ve been rattling-
Austin Wilson:
It’s a lot of talking.
Josh Robb:
… on about inflation.
Austin Wilson:
I know.
Josh Robb:
And so let me give you a dad joke right now.
Austin Wilson:
That’s good.
Josh Robb:
And it’s more of a comment, a thought just for you to-
Austin Wilson:
Bring it.
Josh Robb:
All right, first time, and you probably can think back to your first time for this as well. First time I held a universal remote, I thought, “This changes everything.”
Austin Wilson:
That’s funny.
Josh Robb:
Universal remote, it literally changes everything.
Austin Wilson:
We have a TV that’s probably, this is a smart TV, but it’s old now. It’s one of the first smart TVs, and the apps are getting laggy and slow and yada yada. So we ordered a new Apple TV, because we’re Apple people. Apparently just plugging it in via HTMI to the TV, you can use the Apple TV remote to turn the TV on.
Josh Robb:
Oh nice, you didn’t have to type in the code or anything like figures that out?
Austin Wilson:
Well, you might. Maybe you do. But some at some point-
Josh Robb:
It’s pretty smart?
Austin Wilson:
Yeah, at some point you’re going to be able to do that. And I’m pretty excited about it.
Josh Robb:
Well, so we have an Amazon Fire Stick, and I can use that for my TV and my volume.
Austin Wilson:
See ours, we have the first gen Firestick and it does not.
Josh Robb:
No, it does not.
Austin Wilson:
Now that’s why we’re trying to consolidate, we’ve got apps on the TV-
Josh Robb:
You’ve got them all over the place.
Austin Wilson:
… Firestick, my N64, that has nothing to with the Apple TV-
Josh Robb:
It’s a lot of technology, yes.
Austin Wilson:
… but I have an N64 and it’s awesome, but you have to have an adapter for that, sidebar.
Josh Robb:
Yeah, because it’s so old.
Austin Wilson:
That’s right, I love it. So, okay. That was a really good point, Josh, changes everything.
Josh Robb:
It does.
Austin Wilson:
And when you have that remote in your hand, you just feel like-
Josh Robb:
You’re in control.
Austin Wilson:
… you have control.
Josh Robb:
That’s right.
[30:34] – Closing Thoughts on Inflation
Austin Wilson:
So wrap it up, give us some closing thoughts on inflation, where we’re at, and what this means for investors and people planning their financial future. Is it something to be freaked out about?
Josh Robb:
No, but it’s something to be aware of, because why does this matter for a financial plan? When you’re thinking about retirement, thinking about future, you have to assume some sort of growth. So again, going back to, if I earn a $100,000 this year, and let’s say I spend of that, when taxes and everything taken out, I’m spending 70,000 of that. I need to inflate that forward to say, “What will I need when I retire?” I need to move that number up to a higher and future number, because we know there is some form of inflation. So what number we use, matters. So again, we’ve averaged 2% or less over the last 10 years or so, like we just were talking about. Well, what are we going to do in the future? What if it’s higher? And so planning does matter.
So yes, you need to be aware of what inflation is. You need to use very conservative numbers, and conservative in this case means higher inflation numbers. You need to assume that maybe it will be higher in the future, what the Fed has talked about. That’s what matters. Is it a panic, freak out? No, it’ll be in the news a lot. There’ll be talking about it. We are aware that when you dump in trillions of dollars into an economy, it will cause some form of inflation, because there’s a lot of money moving around, just like Austin was talking about.
But for an investor, stocks, we saw different time periods, stocks tend to do well, regardless of what inflation is there. It’s other factors. The 2000, it wasn’t because inflation was high, it was because we had a .com bubble. 2008, 2009, it was because of global financial crisis. Inflation was muted at that point. Inflation doesn’t necessarily have a bad meaning for the stock market, but it will impact, because companies, their prices will change, their earnings will change. It will have an impact, but it doesn’t just mean, “Oh great now my whole financial plan is ruined.” It just means, “I to be very cautious of what number I’m using for future expectations.”
Austin Wilson:
Yes, so let’s put it this way, Josh. Say we get a period of a little bit higher inflation. Should I buy stocks?
Josh Robb:
Yes.
Austin Wilson:
Should I buy bonds?
Josh Robb:
Sure, if your portfolio needs it.
Austin Wilson:
That is the great answer. In moderation, or something. Yeah, if your asset allocation should have this built in, you should be planning for this sort of thing anyway. And historically speaking, both asset classes have served their purpose through both inflationary and deflationary environments.
Josh Robb:
Yep, and really, we talk about this a lot, and we’ve talked about it in the past. There’s a difference between your return on your portfolio and your real return. Real return is what you got minus inflation. And so if I got a 7% return and inflation is two, my real return is 5%. In other words, I earned 5% after you account for the increase on what it costs me to buy those things. So that’s the number that matters more than anything, is what do I need to do after inflation? Because what we’ve seen historically, is if inflation is at three, well, I still, I may get a higher return because the market tends to be fine with growth.
We’re not talking extreme inflation, but I may get eight, so I’m still netting the exact same amount from seven and to, eight and three, they’re both 5% real return. So returns matter, but they don’t matter as much when you factor in that, if I can keep the same real return, regardless of inflation, I’m on track. That’s, there’s a lot of planning that goes into the whole retirement plan, but the concept is, what do I need to do regardless of inflation to get to my end result? That’s the number you should target.
Austin Wilson:
Absolutely. So, yeah, that’s inflation in a nutshell. This is not the exhaustive discussion on inflation. This is extremely high level, but hopefully it will give you-
Josh Robb:
Now listening, you may be exhausted.
Austin Wilson:
I’m exhausted, that’s a lot of talking.
Josh Robb:
That’s good.
[34:42] – BONUS: Stock Draft Coming Up
Austin Wilson:
But hopefully this will give you some peace. Just work, talk to your advisor if you have questions. This is what they’re for. So give that a thought. And now-
Josh Robb:
Yes, brand new.
Austin Wilson:
Brand new, we want to put a special plug out there for an upcoming, our second annual, The Invested Dads stock draft, which will run from late June through Christmas. So stay tuned in upcoming episodes, for more details on how you can join us in participating in this in some way, shape or form. We’re working that out right now. But for now, be thinking of the companies that you want to, air quotes on a podcast, “Own,” fake money, probably, for the end of this year. So stay tuned for that.
Josh Robb:
So it was really a, last year for those that maybe weren’t, didn’t listen, in June, last year-
Austin Wilson:
You just want to rub it in?
Josh Robb:
Yes, I’m going to remind everybody what happened. Now in June last year, we each picked 10 stocks. And they had to be different sectors, different parts of the overall economy, one per each one. We each held 10 stocks, they weren’t real. It was all fictitious.
Austin Wilson:
They were real stocks.
Josh Robb:
They were real stocks, but we didn’t have any real money involved, but we saw it from the end of June, through the end of December, we looked at performance. The whole point of that was just to talk through active investing, and all the fun stuff we do here. But this year we’d like to have listeners join in. We’re looking on a way that you could choose your own 10 stock portfolio and try to beat The Invested Dads.
Austin Wilson:
Yeah.
Josh Robb:
So it should be fun this year.
Austin Wilson:
So Josh, how can people help us grow this podcast?
Josh Robb:
Make sure that you subscribe, that way every Thursday, you get our most recent episode sent directly to whatever podcast listening device you do. Leave us a review on Apple Podcast, if you use that. It’s a great way to help us rank higher, so that more people will see our podcast. And then finally, if you have an idea or a question about inflation, please shoot us an email at hello@theinvesteddads.com. And then finally, if you know somebody who was asking about inflation, you think this would be helpful, make sure you share that episode with them.
Austin Wilson:
All right, well until next Thursday, have a great week.
Josh Robb:
All right, talk to you later, bye.
Outro:
Thank you for listening to The Invested Dads Podcast. This episode has ended, but your journey towards a better financial future doesn’t have to. Head over to theinvesteddads.com to access all the links and resources mentioned in today’s show. If you enjoyed this episode and we had a positive impact on your life, leave us a review, click subscribe, and don’t miss the next episode.
Josh Robb and Austin Wilson work for Hixon Zuercher Capital Management. All opinions expressed by Josh Austin or any podcast guests are solely their own opinions, and do not reflect the opinions of Hixon Zuercher Capital Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index, would incur fees and expenses, which would reduce returns. Securities investing involves risk, including the potential for loss of principle. There is no assurance that any investment plan or strategy will be successful.
