Coping With Inflation

Different strokes for different generations

Inflation was up 4.9 percent in December 2021 compared to the same month in 2020, according to the U.S. Bureau of Economic Analysis’ Personal Consumption Expenditures (core PCE) Index, released January 28. The PCE Price Index excludes food and energy—areas where Americans are also being squeezed.

A virtual media briefing held by The Conference Board on January 27—and attended by “Advisors Magazine”—noted that the association expects Core PCE inflation to be above the 2 percent target through Q4 2023. It should begin to ease, however, in Q1 2022 on a year-to-year basis, from just above 4 percent in Q1, then gradually leveling off to 3 percent by the end of the year and stabilizing at 3 percent year-to-year in 2023.

Driving inflation are both temporary and persistent factors, according to The Conference Board—the global, member-driven think tank providing insights for what’s ahead since its founding in 1916.

DP 2“Some inflation is temporary, pandemic-related,” said Dana Peterson, global chief economist at The Conference Board, “but other structural and policy pressures will remain.”

The temporary factors include strong demand for goods, emerging demand for services, energy price volatility, easy monetary/fiscal policy, strong housing demand, factory closures abroad, supply chain bottlenecks, transportation costs, commodity prices, the semiconductor shortage, and wages.

Viewed as persistent factors are continued demand for goods and services, the chip shortage, millennial demand for housing, working from home versus cities, labor shortages, deglobalization, the transition to renewables, and easy monetary/fiscal policy.

Peterson did point to several offsets to inflation such as monetary policy tightening. The Conference Board said the Federal Reserve as likely to hike interest rates four more times this year.
Other offsetting trends cited are retail competition and discounting, automation, greater efficiency, online shopping, the Gig Economy and contract work, remote jobs, outsourcing, increased supply, improved infrastructure, the greening of the economy and more free trade pacts.

Regardless of possible offsets, observers and experts agree it’s time to hunker down for inflation. How individuals cope with and prepare for it may well vary depending on their age.

“Inflation favors people who own assets, such as homes and stocks, because the value of those assets increases with inflation,” Karen R. Keatley, MBA, CFA®, CFP® and principal/chief wealth management officer at Modera Wealth Management told “Advisors Magazine.” “In fact, the two most effective ways to amass long-term wealth are home ownership and investing in stocks,” she added.

Keatley, based in Charlotte, North Carolina, worries that the younger generations have not had opportunities to accumulate enough wealth to buy homes or build investment portfolios.

KK“This partially has to do with just being young,” she explained. “But millennials also have been negatively impacted by bad timing – coming of age during the financial crisis and Great Recession has resulted in persistently lower earnings compared with people who entered the job market in boom times.”

Keatley is also concerned that millennials and Gen Z’ers have learned the wrong lessons about investing. “Some are overly attracted to anti-establishment fads such as cryptocurrencies and NFTs,” she said. “They tend to mistrust the financial markets and overestimate the risk from stock market volatility. These generations also may be reluctant to buy homes after witnessing the real estate carnage in 2009; meanwhile, home values have been inflating and may have become out of reach.”

Millennials tend to be more risk adverse, according to Cecile Hult, CFP, CDFA and a partner/private wealth advisor at Virginia-based Argent Bridge Advisors. “This is likely due to the fact that they experienced the Great Recession of 2008 while they were young adults and just entering the workforce,” she said. “Their unwillingness to invest their savings in the market could mean that they will be losing money safely,” Hult added, “and their savings and portfolio simply won’t be able to keep up with inflation.”

Another concern for millennials is that they have the lowest rate of home ownership of any other generation before them, Hult acknowledged. “This leaves them exposed to rising rents,” she said. “Mortgages tend to be relatively a fixed cost—other than property taxes and insurance.”

Hult added that the 2021 jump in home pricing values averaged about $50,000. “This will make home ownership more difficult in the future for millennials,” she said.
Homeowners, in fact, appear better positioned to counteract inflation.

CH 1“The first thing to do, a no-brainer in my opinion, is to lock in current low mortgage rates,” Keatley recommended. “If clients have floating-rate mortgages, now is a good time to lock in attractive long-term, fixed-rate loans.”

She noted it might even make sense for a client who doesn’t have a mortgage to get one. “Inflation favors borrowers because debt amounts remain fixed while asset values increase,” Keatley said. “It’s the ultimate inflation play.”

For retirees, rising prices can be damaging. “Despite this, the conventional wisdom and approach has been that a retired person’s investment portfolio should be ‘conservative’ with a weighting toward bonds,” Keatley added. But she contends a stable or fixed income translates to declining purchasing power during inflationary times.

“The one asset class that does a really good job as an inflation hedge, providing increasing income over time is stocks,” Keatley insisted. “Historically, stock prices AND dividend income have grown a lot faster than the rate of inflation.”


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