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Why Inflation Isn’t an Issue. Yet.

U.S. News and World Report Smarter Investor

Inflation still remains below the 50-year historical average.

It seems like I’m fielding a ton of questions about inflation lately and it got me thinking, “Why are so many people beginning to ask me about inflation now?”
I suppose the price of oil and gas is one reason, and it’s natural to extrapolate the increase of that commodity across the supply chain and assume that means the price of everything will go up. It’s also possible that people are tuned into the forces of inflation based on the run-up and recent price of a certain shiny metal—you know, that 4-letter “G” word. There is also the non-stop talking heads on TV running on and on about their opinions concerning “this, that, and the other thing,” which usually includes some opinion about inflation.

First, I think any sort of real inflation problem is way off in the future. Year over year (as of May 2011) the CPI has ticked up from a reading in February of 2.2 percent to 3.4 percent. However, that includes energy costs and food, which are volatile. The core CPI, which excludes the prices of energy and food, is useful to look at because it will paint a picture of the rest of the things we buy that are less volatile in price. That reading has moved up from 1.1 percent in February to 1.5 percent in May.

I listen to a lot of arguments about the validity of both of those readings, but to put those numbers into some historical context, the 50-year average (thanks to David Kelly, Andrew Goldberg, and their research team at JP Morgan Funds) of those readings is 4.1 percent.

A headline CPI of 3.4 percent and core CPI of 1.5 percent are a long way off from an average of 4.1 percent.

Also, if food and energy cost more, that slows economic growth. In turn, that counteracts inflation.

Finally, it’s really important to account for one huge component of the inflation picture: wages. The amount of money people make is such a huge lever on inflation that it’s really important to watch. When wages go up, people have more money to spend and historically, Americans spend money.

However, with the unemployment rate above 9 percent and wage growth hindered by economic conditions, this lever is not being actuated and is helping to keep inflation readings low for now.

Taking all this into account, here’s what I think about inflation: There is some inflation and that is actually a good thing. The implications of a deflationary environment are negative to the overall economy.

It really comes down to possible versus probable. The doom and gloom hyperinflation scenario that everyone seems to be concerned about is not something I see as probable while the current readings are historically low. Additionally, rapid inflation will probably slow growth and create a counter effect and wage growth is currently nonexistent.

Is hyperinflation possible? Yes. Probable? Not likely, especially anytime soon.

David B. Armstrong , CFA, is a managing director and cofounder of Monument Wealth Management in Alexandria, Va., a full-service wealth management firm. Monument Wealth Management is backed by LPL Financial, the independent broker-dealer and Registered Investment Advisor. David has been named one of America’s Top 100 Financial Advisors for two straight years by Registered Rep Magazine (2009 and 2010, based on assets under management) and has been interviewed by several national media sources over the past several years. Follow David and Monument Wealth Management on their blog Off The Wall , on Twitter at @MonumentWealth and @DavidBArmstrong, and on their Facebook page. Securities and financial planning offered through LPL Financial, Member FINRA/SIPC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual investors. To determine which investment is appropriate, consult your financial advisor prior to investing. All performance references are historical and do not guarantee future results. Asset allocation does not ensure a profit or protect against a loss.

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