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What We Need Now is Some Inflation

Yes, it sounds illogical, but according to Federal Reserve Chairman Jerome Powell, we need to push inflation higher. See, he knows too little inflation does not foster economic growth. And we need economic growth.

Businesses cannot move forward unless they can increase prices on their goods and services. Two byproducts of this are decreased unemployment and wage increases. In sharp contrast, a slow-moving economy equates to a low standard of living, increased unemployment and low interest rates.

Basically, the economy operates based on expectations. Economists typically do not look at today; they look at six months from now. They want economic growth because it causes wages to rise and people to buy and spend more. 

In Powell’s “Monetary Policy Framework Review” speech, he refers to a yearlong examination comprised of open events on what policy should look like in the future. Powell is touting average inflation targeting, which allows inflation to run a bit higher than its healthy level target of 2% for a stated period of time. So, how does this affect you?

Americans Have Stayed Afloat 

When you think about upping the inflation target, after employers shed more than 22 million workers from their payrolls in the early months of the COVID-19 pandemic, there is an interesting dichotomy occurring.

Nearly 18 million people were considered temporarily laid-off workers up until July, when the outlook began to deteriorate. Unfortunately, a quarter of the temporary layoffs will become permanent and some 2 million people could remain unemployed well into 2021.

As you have read in previous Hefren-Tillotson blog articles, we remind readers to have a well-funded emergency fund that will carry them for at least 6 months of lost wages. This can be in cash at home, in a checking or savings account or a liquid investment account.

Recently, the Associated Press-NORC Center for Public Affairs Research reported that 45 percent of Americans say they have been setting aside more money than usual.

Since February, there has been a $1.3 trillion jump in money kept in checking accounts, which accounts for a 56 percent increase, according to the Federal Reserve.

Equally important, at least 25 percent say they are paying down debt faster than they were prior to the COVID-19 pandemic.

It’s Really About Being Prepared – and Protected

As you probably know, many of our Hefren-Tillotson clients have been with us for several years, through bear markets and severe market events like Black Monday in 1987, the largest one-day stock market crash in history.

Like the rest of us, they also experienced 9/11, the deadliest terror attack in world history, and the longest market closure since 1929. And then, the Great Recession, between 2007-2009, which led to the longest running bull market in history from 2009 to 2019.

Today, despite the worst global health pandemic any of us ever experienced, everything we told our clients about MASTERPLAN® was true.

It has stood firm, ready to take on whatever dared to threaten or confront it, and all we asked our clients to do was to stick to the plan, a blended plan, with a built-in margin of safety to tackle the toughest times.

And if you think high-net-worth clients don’t get a little worried when world events affect the markets and their own personal well being, think again. They do. But they seem to handle it better than most. They have seen corrections come and go. During recent selloffs, they actually added more money to their accounts.

Market savvy can come from education. They know that it is not about beating an index, or the value, or even a rate of return. For them it is about the income they draw from their portfolios being unaffected by the daily market movements. And as we do with all of our clients, when we find they are overspending, too often, we bring it to their attention. Unlike other advisory firms, we do not tell our clients how much they are allowed to spend.

The Stock Market is not the Economy

Even at our currently low inflation rate, have you noticed how much the cost of food has risen? Some shoppers blame it on the individual grocer, but the fact is food costs increased 4.5%. The biggest offenders were meat, poultry, fish and eggs. Each one of those purveyors was hurt by America’s shutdown. Sadly, some farmers literally had to dump their milk supplies because it spoiled from the failed attempts to get trucks to deliver it to the stores.

If there was good news – and there has been plenty of it from the advances in the stock market – it is the price of gas down by 23%. When the coronavirus pandemic hit, and we were all confined to quarters, driving was cut dramatically. However, that summer demand has increased with more people returning to work. Prices are still low.

Aside from diminishing your purchasing power, inflation and higher prices generally reduce consumption. You may find ways to stretch that gallon of milk. But, typically what happens is you have less money to spend on other goods and services when you cannot stretch as a result. That income pie can only be sliced up so many ways before it’s gone.

So, it is likely that all the Fed chairman wants is for consumer prices to rise about 2% each year. It might not seem justifiable in some peoples’ minds, but we can handle it.

DISCLAIMER: Past performance does not predict future results. This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.

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