Financial
Apr 5, 2022

Inflation: The Causes and Costs

Sponsored Content provided by John B Zachary - Wealth Advisor, Pathfinder Wealth Consulting

Recent readings have put the topic of inflation in the spotlight in a large way, attracting the attention of economists, investment managers, and the average investor. 

In its simplest form, the concept of inflation is widely understood: a loaf of bread costs more today than it did 30 years ago. In technical terms, inflation is defined as “a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services.”

The cause of inflation can be derived from this definition. For a recent example, we can look at the COVID-19 pandemic and its impact on the investment markets and economy. Massive distributions, in the form of stimulus payments, put cash directly into the hands of individuals and business owners throughout 2020 and 2021. Additionally, low interest rates (controlled in large part by the Federal Reserve) made borrowing cheap. Those two factors affected the “volume of money and credit.” 

The economy bounced back aggressively in the second half of 2020; but while spending intensified (due to incoming stimulus), the availability of goods and services did not. Prolonged manufacturing delays, supply chain shortages, and labor force issues have had ripple effects across the economy, ever since COVID-19 became a part of our everyday lives. This is the “available goods and services” portion of the definition. 

This divergence in supply and demand resulted in huge increases on everything from home prices (due to low interest rates) and vehicles (due to semi-conductor shortages) to the cost of raw materials and everyday goods, leading to the highest inflation readings that we’ve seen in four decades. The Russia/Ukraine war has since added fuel to the fire, causing further price increases on oil and other raw materials. 

In a steady state environment, inflation is to be expected and is a sign of a healthy economy. However, when inflation accelerates too quickly it can have negative consequences, and in a worst-case scenario, can hurt spending enough to push us into a recession. Looking backwards, the inflation we’re seeing now is the culmination of a perfect storm of factors; but that doesn’t make it any more pleasant for our wallets.

During times like these, we often get questions about how to protect against prolonged inflation. Generally speaking, the best way to fight inflation over time is to own stock. More specifically, value stocks or “blue chip stocks,” are historically good places to invest during inflationary times. Even for retirees, having stocks in your portfolio (within the constraints of your risk profile) is important to ensure that your assets grow at a rate that will outpace rising prices. Generally speaking, these “value stock” companies have strong balance sheets and are able to offset higher input costs with higher prices for the consumer, meaning they are not impacted as adversely by the increased cost of raw goods. Additionally, they produce a relatively higher current income stream (via dividends) to investors. In a rising inflation environment, it’s very obvious that a dollar today is worth more than a dollar in the future. 

Eventually, we think inflation will naturally fall to normal rates (around 2-3%), as the Fed fights to de-stimulate the capital markets and economy, and lingering supply chain issues are resolved. However, it is important to remember that inflation is a normal (and important) part of our economy. At Pathfinder Wealth Consulting, we stress test our clients’ financial plans with real-world scenarios every day. Our goal is to help our clients build a financial plan that aligns with their goals today and into the future, no matter the obstacles along life’s path. If you would like to talk about how your financial future will stand the test of time (and inflation), visit our website, or give us a call at 910-793-0616. We are here to guide you forward.  


Advisory services offered through Commonwealth Financial Network®, a Registered Investment Advisor.​

As a wealth advisor at Pathfinder, John works closely with folks who are planning for their future, helping them stay on their financial path.  He also specializes in developing financial plans and investment strategies for the second generation and younger families.  John has been a part of the Pathfinder team for more than 12 years, serving various roles in both planning and investments for our clients. 
 

Ico insights

INSIGHTS

SPONSORS' CONTENT
Jasonpathfinder3

Navigating the Road to Retirement: The Indispensable Benefits of a Well-Crafted Financial Plan

Jason Wheeler - Pathfinder Wealth Consulting
Cfss headshots parker robert webversion 21422121214

Duke Energy Will Pay You Up to $9,000 to Go Solar with a Battery

Robert Parker - Cape Fear Solar Systems
Dave sweyer 300 x 300

Insights into the 2023 Leasing Market in Wilmington, NC: What You Need to Know

Dave Sweyer - Sweyer Property Management

Trending News

Lower Cape Fear LifeCare Welcomes New Board Members

Staff Reports - May 28, 2024

Novant To Sell, Leaseback Four Wilmington-area Properties In Statewide Effort

Emma Dill - May 28, 2024

CVB Announces Tourism Award Winners

Staff Reports - May 28, 2024

United Bank To Acquire The Piedmont Bank

Audrey Elsberry - May 28, 2024

UNCW Honors Faculty Awards Recipients

Staff Reports - May 28, 2024

In The Current Issue

Submarine Museum Could Surface Here

​A museum would continue to support those military families and honor submarine veterans but also serve as a way to provide science and math...


MADE: Bean Counters By The Sea

Marine Bean is a family-owned and -operated business that buys all of its materials in the U.S., makes its marine-grade bean bags in Wilming...


As Hurricane Season Heats Up, How Do Builders, Laws Prep Homes For Storms?

The damage caused by Hurricane Florence in 2018 throughout the region put a bigger spotlight on the need for the construction industry to fa...

Book On Business

The 2024 WilmingtonBiz: Book on Business is an annual publication showcasing the Wilmington region as a center of business.

Order Your Copy Today!


Galleries

Videos

2024 Power Breakfast: The Next Season