The reason I got to reminiscing about Col. Kittinger again is because of something our much less exciting Federal Reserve Chairman, Mr. Jerome Powell, said about inflation a few months back. This is not a direct quote, but he commented that he was actually a little relieved when inflation started going up. He was worried that our inflation rate was stuck, and we would end up having the same trouble Japan has had since 1991. They have been experiencing deflation, and despite their best extraordinary efforts for the past twenty years have not been able to end the cycle. Deflation is the general decline of the price level of goods and services, and though it is the opposite of the inflation we are experiencing now and fearful of, it is also quite damaging to an economy.
How does this comment relate to Joe Kittenger’s fall to Earth? He also thought he was stuck, though in a different manner. Shortly after stepping out of the gondola he saw the planet beneath him, but due to the lack of friction, wind, and sound he couldn’t tell he was moving. He had the distinct fear that he was too high, beyond the reach of Earth’s gravity, and would be stuck in orbit. That is a very unique and terrible fear to consider! Luckily he flipped over for a few seconds and caught sight of the gondola and weather balloon shooting into space at an incredible rate as he fell away from it.
Inflation continues to headline the news. It is something that affects us all as members of the economy and as consumers, but it is also pertinent to investors. We are definitely experiencing inflation as consumers, and see this in the grocery stores and at the gas pumps. If inflation is going to continue to rise and be persistent we will experience it more and more as investors, and we have to consider this as we save for and live in retirement. Your real rate of return is calculated after accounting for fees, taxes, and inflation.
I want to comment briefly on my understanding of the inflation we are experiencing now and its possible direction, based on everything I’ve been reading and hearing from economists and other analysts. As with every other subject people discuss, you are going to have two sides. On one side, the biggest talking point is the massive amounts of money the government is creating and pushing out into the economy. This must lead to long-lasting inflation they say, which is definitely a possibility. However, there really is no way to be certain of that point. We have examples throughout history of inflation occurring without monetary policy, and inflation occurring from monetary policy. Now that we are all feeling inflation after so long, we are starting to learn that the 2.0% inflation target the FED has aimed for has been hard to reach and hold to. Until this year, the average U.S. inflation rate since 2008 has been 1.72%.
On the other side of the argument, which is where our FED Chairman stands, the huge uptick in inflation we are experiencing is “transitory.” We are seeing higher prices mostly from the vastly increased demand for things people have at a time when supply is struggling to catch up. We shut down factories, workers left work, and it is has been hard to catch up to the production and transportation levels we were running before the pandemic. Jerome Powell and the Federal Reserve board of directors believe a large portion of the inflation we are seeing will be gone once those production and transportation issues get resolved. People in this camp see inflation ending higher than the FED’s 2.0% target in 2022, with many going up to 3.5%. However, most predict average inflation over this decade being slightly higher than the 2.0% target.
Inflation is a very tricky subject, even for the best economists out there. It is somehow related to GDP and employment, but precisely predicting the rate of inflation is definitely more art than science. We as investors can’t simply ignore it, but there is no magic pill. We can’t invest to any great precision for an inflationary future unless we know perfectly what the inflation rate will be, and when it will change. None of the marketed cure-alls are real, like the natural resource equities, commodities, junk bonds, or alternatives I’ve been hearing about lately. Nothing is really proven to “hedge” inflation. My advice on inflation remains similar to what my advice has been in regards to administration and tax changes. We need to be observant and vigilant. We need to monitor current investment allocations and rebalance as the demands of our life dictate.
There may be a small silver-lining to all of you who are currently receiving Social Security benefits. The social security cost of living adjustment (COLA) for 2022 will be 5.9%, the biggest increase in 40 years. Although that is due to the bout of inflation we are experiencing, if that inflation does in fact end up being transitory, this big bump will be very evident next year. Those increased payments will begin in January.
Inflation really is a complicated, but interesting (if you are a financial dork like me), subject. If you have any other questions about it I’d be happy to discuss them with you. Also, the Joe Kittenger story is really fascinating if you aren’t familiar with it. The U.S. Air Force program to test the flight suit and parachute he used from such extreme heights was called Excelsior III. More recently, in 2012, Col. Kittenger assisted Felix Baumgartner in his Red Bull Stratos jump from 127,854 feet. This was an exciting and record breaking feat as well, but nothing compared to Kittenger’s pioneering, low-tech feat half a century earlier.
I wish you all the best with the upcoming holiday season. We are here when you need us.