Inflation

Inflation, the general increase in the price of goods and services, is making a comeback.  The headlines all talk about the possibility of deflation but the evidence shows real inflation.  While deflation is bad when inflation gets high it can hurt a lot.  Remember the 1970′s or Germany in the 20′s.  Investors, workers, and especially retirees must protect themselves from the ravages of inflation.

The government statistics report low on no inflation.  Our government has a vested interest in reporting low inflation numbers.  Because our income tax brackets are adjusted for inflation, using inflation numbers from the same government, both state and federal income tax revenues increase.  At the same time, using lower than actual inflation numbers reduce expenses for things like social security payments and other programs.  This leaves the politicians more money for new programs and the bureaucrats can get bigger raises.  For the government inflation higher than they have to report is a “win-win”.

The evidence high inflation is in our everyday purchases.  For us it is in higher food prices, electricity bills, cable bills, health insurance (will go up more as the Affordable Care Act continues to wreck the health care sector of the economy), car prices, clothing costs, and the prices of many small items purchased regularly.  If you check regularly many of these costs have increased for you as well.  An example:  beef prices have risen as much as 25% in the last year.  Home prices are rising and rents are rising rapidly.

The government uses some tricks to report lower inflation.  Prices for computers are staying flat or sometimes going down as speed and memory increase.  The government reports this a price decrease as the cost per unit of computing power comes down.  Since most of us don’t buy a new computer every year we don’t directly benefit from lower computer costs.

There aren’t many things an investor can do to protect themselves from higher inflation.  In the 70′s stock prices were flat and bond prices fell slowly.  But, there are a few tactics that will help.  One is to buy stocks of companies that regularly raise their dividends.  Companies like Johnson & Johnson, Procter & Gamble, Coca-Cola, and 3M are all large companies that regularly raise their dividend and Legget & Platt is smaller company that is a dividend grower.    We own shares of Procter & Gamble and Legget & Platt. For small investors or inside an IRA or 401(k) a good dividend growth stock mutual fund can be a good idea.

In inflationary times growth stocks can be good investments if you are careful in the selection.  Just increasing revenue is not a sign of real growth during inflationary times.  You have to dig deeper and find companies that increase unit sales.  For a company like Coke that means are they selling more cases of soft drinks and not just raising the price.  For a service company it usually means increasing the number of customers.  This is harder to find for the small investor but can be found in analyst reports.

Hard assets can increase in value during inflationary periods but most usually only maintain the value over long periods of time and don’t actually beat inflation, while some don’t work at all.  Real estate can hold or increase in value if you are an expert in the local market and don’t lose too much in transaction costs.  The other downside is the lack of liquidity.  Farm land is risky as the price is determined by crop prices and they are quite volatile.  Gold and silver don’t work at all and are only good for speculative trading.  Bonds lose value during inflationary periods.

For people that are working there are a few things that can help.  First develop a list of purchases that are discretionary.  It may be luxury items like jewelry or electronics or it may be the family vacation and develop plans to reduce or eliminate some of these expenses.  Invest in good energy conservation items for your home like smart thermostats or energy efficient lighting.   Next always stay on the look out for a higher paying job or career opportunity.  Your earnings will have to increase to keep up with inflation and if you are in a job where your pay won’t increase or you don’t have opportunity for advancement then look for a new job.  Get more education if required or train to work in a new field.  Health care is a rapidly growing field that requires more workers than are available, especially nursing or physical therapy.  Electricians and electronic technicians are also in demand.

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