Inflation May Not Play Out Like You Think

At just about every meeting I go to these days, people are asking about runaway inflation. What concerns me about the inflation issue is the certainty many people expresses about how the inflation threat may unfold. While we may get inflation, its effect on the economy and markets may play out differently than in the past.

In finance, if you've learned anything over the last decade, it's that nothing is so certain that you can bet the ranch on it. The technology revolution didn't end as planned and neither did the sure fire real estate market.

So while it's important to be prepared for high inflation, you need to recognize that it's a possibility not a certainty. There are other paths that the economy could take as a result of inflationary pressures over the next three to five years.

Here's why:

• You see, everyone knows about the damage that inflation can do, and investors are scouring the markets for any whiff of inflation.
• When hyperinflation first appeared in the 1970s, investors weren't on the lookout for inflation and weren't aware of the damage it could cause. Remember, prior to the 1970s, we hadn't had a period of slow growth and high inflation, which is why the term stagflation emerged to describe the economic environment of the 70s.
• Now that we all know about inflation, if investors start to see inflationary pressures build, it's certainly possible the bond market may kill it off before it takes root.
• Basically, if bond investors fear inflation, they will begin to sell bonds and cause interest rates to rise to compensate for the threat of inflation. If rates rise, that will put more pressure on the economy and may throw us back into another recession. Then inflation may subside and rates may fall again.

The end result from inflation pressures may not be runaway inflation, but another recession, or some other path that we haven't imagined yet. Or, maybe we get lucky and recover without big inflation.

Basically, you don't know how it will turn out, so you shouldn't bet big one way or the other. By the way, the Consumer Price Index data released this morning just showed the biggest decline in prices since 1950.

Bottom line. High inflation is more likely over the next five to 10 years than it's been in a long time. But it's not a certainty. Have a strategy to address inflation if it occurs, but it's dangerous to build your entire portfolio around the prospects of runaway inflation.

Disclaimer: The copyright of this article belongs to the original author. Reposting this article is solely for the purpose of information dissemination and does not constitute any investment advice. If there is any infringement, please contact us immediately. We will make corrections or deletions as necessary. Thank you.