Inflation Is Real - Here's What to Do
What’s the state of inflation? And if it is here, which assets tend to do well in inflationary environments?
Official Inflation
Official inflation, or those numbers published by the federal government, are tracked and reported by the BLS, or Bureau of Labor Statistics. Per the BLS, the Consumer Price Index, or CPI, is up an annualized 3.8% in April. The Producer Price Index, or PPI, is up an annualized 6% in April. And energy, which accounts for 40% of the CPI, is up 3.8% for the month.
Inflation in 3’s
Inflation comes in three flavors – demand-pull, cost-push, and monetary. Details? Demand-pull can be described as everyone wants the same thing at the same time, and there aren’t enough to go around. So the price of available units goes up. Essentially too many dollars chasing too few goods. Is it bad? It indicates consumers have money to spend though the downside can be a demand for increased wages to keep up with price increases.
Cost-push comes from the opposite direction. Instead of demand pushing prices up, producers are forced to raise prices because their own inputs/costs, such as labor, raw materials, energy, transportation, have risen. The difference? Cost-push inflation can happen even when consumer demand is flat or falling. The tell for cost-push inflation, which is our current state, is that PPI runs well ahead of CPI. Producers feel the squeeze first, and absorb some of the hit, before eventually passing it on to consumers.
Monetary inflation is also too much money chasing too few goods. However, its source is not consumer demand, but the federal government’s printing and releasing too much money into the marketplace. That too, has been our state of existence since at least 2020. This type of inflation is the most painful as it’s broad-based and persistent, showing up everywhere at the same time.
Federal Debt and U.S. Bonds
Federal debt crossed the $100 billion mark in 1943, the $1 trillion mark in 1982, and the $10 trillion mark in 2008. Then? $15 trillion in 2012, $20 trillion in 2017, $30 trillion in 2022 and $36 trillion in 2025. Debt to Gross Domestic Product (GDP), which may be a more meaningful way to assess? 30% in 1980, 60% in 2008. 132% in 2020 and 122% at the moment. The trajectory is unsustainable.
How are Treasury Bonds responding? According to Torsten Slok, short-term rates are rising due to inflation. The middle of the yield curve is being pushed up due to massive bond issuance by AI companies to fund their infrastructure. The long end of the yield curve is being pushed up due to the massive and growing federal debt. Remember, bond prices go down when the yield goes up. In short, bond traders have no confidence that our political class will bring order or control to the spiraling federal debt.
Your Experience?
If it’s like mine, you are experiencing inflation with every grocery store run, every meal out, every fill up of the gas tank. For those of you who travel by air, in airline tickets. What prices are down? Home prices and hotel rooms. Those are the only ones I’ve noticed.
Where to Invest?
Cost-push inflation often favors commodities and inflation-linked bonds. Monetary inflation punishes bonds, which we are seeing with increasing yields. Such monetary inflation rewards gold, real estate, and hard assets.
What are we doing? Encouraging an allocation to investment real estate (directly held, not in funds or ETFs), smaller allocations to gold and silver. And equities? Dividend-paying securities in energy, food, agriculture, and housing. In other words, defensive positions designed to meet the needs of humanity. Consumers will be replenishing their cabinets whether they can afford a vacation or not.
In Summary
Inflation is alive and well and we expect it to be for several years. Just say no to debt, whether you owe it or own it. Develop diversified recurring cash flow separate and distinct from your earned income. Having done that, rest.
And until we see you again, wishing you only the best.