1/33: Inflation seems to be headlining the news these days. It’s a powerful force and worthy of attention, but it’s often misunderstood and conveniently misused by investors, politicians and policy makers to justify positions. Let me simplify and reframe the narrative: 
2/33: What is inflation? It’s a general increase in prices and fall in the purchasing value of money. When your dollar or pound or yen buys less today than it did yesterday, your money has lost value due to inflation. If it sounds scary, you’re starting to grasp the issue.
3/33: Because we live in a country with fiat money, our government has a lot of control over the supply of money which is a major driver of inflation. And when demand for goods increases faster than the supply of goods it can drive inflation.
4/33: The Consumer Price Index and Wholesale Price Index are two common indexes for measuring inflation. But guess what? They both have major flaws any discussion that frames inflation in terms of CPI or WPI is missing the broader point. So let’s toss them away for now.
5/33: Instead of framing the discussion around the buying power of a monetary unit, the more relevant discussion centers around the ability of a person to afford their lifestyle. It’s about the easy or difficulty to stabilize or improve one’s standard of living over time.
6/33: The reframing is necessary because inflation doesn’t impact everyone equally. Consider the hypothetical scenario where every good and every service doubles in price over a 1-year period. Is this good or bad for Joe Renter? What about Jane Homeowner or Bill Business Owner?
7/33: If over the same 1-year period wages doubled, interest rates on new and historical loans doubled, and interest rates on savings doubled then the nominal impact to Joe, Jane and Bill would be the same. This isn’t a realistic scenario but it illustrates an important point.
8/33: In the real world, prices of goods and services can increase quickly. Interest rates on savings and on new loans are adjusted frequently. But many forms of historical debt can’t be repriced (fixed rate loans). And wage growth tends to lag inflation without intervention.
9/33: By reframing the discussion, we end up with a very different narrative than is typically discussed in the popular media. What follows is a reframing centered around distinct “how life is for me” personas and the impact of inflation on the different groups.
10/33: How Life Is For Me: The basics are too expensive
For many people, the cost to buy the basics in life exceeds their income. For people who are “technically insolvent”, life is a day-to-day struggle and a near impossible juggling act.
For many people, the cost to buy the basics in life exceeds their income. For people who are “technically insolvent”, life is a day-to-day struggle and a near impossible juggling act.
11/33: A large % of these individuals work in professions with very low wages and/or are welfare recipients. For these individuals, whether or not they’re better or worse off over time is a function of public policy as much or more than a function of CPI.
12/33: The debate over increasing minimum wage to a “working wage” matters significantly to low income wage earners. The minimum wage hasn’t kept pace with inflation, so any major national policy change or movement in corporate policies will impact this group greatly.
13/33: And policy changes to min wage have always come in major step functions that vastly exceed the in-period increases in CPI. Policy making tends to be a game of catch-up. So for this group, the result of the ongoing wage debate will dwarf any near-term impact of inflation.
14/33: It’s also important to internalize that there are other policies being debated that aim at improving “life affordability” for the typical American that have a greater impact than inflation. Healthcare, childcare, affordable housing, parental leave --- they matter.
15/33: How Life Is For Me: Today is affordable but debt isn’t
For many people, they can afford the everyday costs of life but at some point in the past accumulated significant debt. Paying for food, clothing and shelter would be easy if it weren’t for those pesky loan payments.
For many people, they can afford the everyday costs of life but at some point in the past accumulated significant debt. Paying for food, clothing and shelter would be easy if it weren’t for those pesky loan payments.
16/33: One way inflation can help consumers is to make financed goods and services less expensive. If your wages can keep up with inflation and you can pay for yesterday’s purchases with tomorrow’s dollars then you want inflation to run and run and run.
17/33: Imagine being on a fixed repayment plan for your student loans with a $1,000 a month payment obligation. Today’s payment cost you $1,000 of today’s purchasing power. But if inflation runs at 4% a year, a payment 10 years from now will cost $500 in today’s dollars.
18/33: And if you’ve financed an appreciating asset like a house then you should be inflation’s biggest fan. Imagine buying a $500K house with a $50K down payment. Even if the price only appreciates at the pace of inflation, you’re minting equity.
19/33: A reasonable assumption in today’s market is that the price of a house could appreciate 5% a year in a 3-4% inflationary environment. That means that in a 10-yr period, $300K+ of non-principal-payment equity has been generated, $100K+ of which is in excess of inflation.
20/33: How Life Is For Me: A main-street small business owner
If you’re running a typical small business in a typical city and sell goods/services to typical consumers then inflation is something that could have a massively negative impact on your business.
If you’re running a typical small business in a typical city and sell goods/services to typical consumers then inflation is something that could have a massively negative impact on your business.
21/33: In inflationary periods, labor costs and the raw cost of physical goods your business sells will typically rise. If the demand for your product/service is strong then you can absorb these costs through price increases to your customers.
22/33: But if demand for your product/service falls as price increases then your business is in a tough spot. Many small business owners oppose increases to minimum wage for this reason. They’re afraid consumers won’t be willing to absorb the cost.
23/33: Government policies matter to small business owners because they impact profitability more than inflation ever will. Employment policies, taxes, benefits, regulation, etc. They care about politics because their business’s survival might depend on who’s in office.
24/33: How Life Is For Me: Doing great
For many people, they can comfortably afford the everyday costs of life with excess left over that is either saved, invested or used to fuel an increased standard of living.
For many people, they can comfortably afford the everyday costs of life with excess left over that is either saved, invested or used to fuel an increased standard of living.
25/33: For this population, wages tend to increase at or above the pace of inflation, especially for upwardly promotable individuals who are in professions with layers of management and/or individuals in professions where experience correlates with pay.
26/33: Lawyers and doctors don’t worry about inflation. When life becomes more expensive they charge more. In contrast, teachers and firefighters don’t control what they charge for their services and their salaries struggle to outpace inflation.
27/33: So if a worker has the ability to increase income when the cost of living increases, then they’re significantly protected against the forces of inflation. They face a different challenge: Protecting/growing the buying power of their excess cash flow.
28/33: Simple savings vehicles like CDs or Treasuries or Savings Accounts destroy value if the interest rates on these vehicles are lower than the rate of inflation. Parking money in a 1% yielding CD in a 3% inflationary environment is the equivalent of burning money.
29/33: But these people have choice. And there are investment categories that over time have outpaced inflation. Gold has its ups and downs but has held its value over the past 100+ years. Farmland is another well-documented hedge.
30/33: Home price appreciation has outpaced inflation by 1-2% a year and the macro forces suggest this trend is positioned to accelerate. And the annual returns in the stock market over its 150 year history have crushed inflation.
31/33: With excess, people can choose to invest in categories that outpace inflation. And for these people, inflation typically generates wealth because their tangible assets become worth more over time. So guess who should like inflation? Investors.
32/33: The truth is that inflation can be scary if you’re struggling to afford every day life or your small business is barely squeaking by. But government policies matter even more. And for those with excess, there’s a pretty clear playbook for how to more than offset inflation.
33/33: The TL;DR: If you’re in an upwardly mobile profession, your career is your hedge against inflation. If you’re well-off, invest in tangible assets to hedge inflation. But if you’re a typical American, public policies matter much more than inflation ever will.
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