By Tom Sedoric and Casey Snyder

In early May, U. S. Treasury Secretary Janet Yellen sent the financial markets into minor chaos. She casually mentioned in an interview that “it may be that interest rates will have to rise somewhat to make sure the economy doesn’t overheat.” She was referring to a fast-growing economy coming out of the Covid-19 pandemic funk combined with major enacted and proposed spending plans by the administration of President Joe Biden.

Yellen, a former chairman of the Federal Reserve, immediately walked back her remarks later in the day, saying, “it’s not something I’m predicting or recommending.”

Inflation hasn’t been a major issue in the United States since the dreary Stagflation days in the late 1970s and early 1980s. The formula was: high unemployment, double-digit inflation, and interest rates. If anything, we have had periods of deflation, disinflation, and coflation. Yet, the mere mention of rising inflation can send markets reaching for proverbial smelling salts for reasons as much psychological as they are economic. The fear of inflation is so ingrained in our historical DNA that modern economic policy conventional wisdom opts for high unemployment or even a recession as a proper price to pay to keep inflation low.

Out-of-control inflation, or hyperinflation, can have a traumatic impact on a country’s economy, its society, and politics. The economic historian John Kenneth Galbraith observed: “nothing so weakens a government as inflation.” Modern history offers numerous examples of why inflationary fears can be unsettling. A century ago, the post-World War I Weimar Republic in Germany was undermined by inflation rates from 1921 to 1923 that ran as high as 322 percent a month. Hungary’s recovery from World War II was undermined by an inflation rate beyond comprehension. In July 1946, Hungary recorded a monthly inflation rate of 41.9 quadrillion percent, with prices doubling every 16 hours.

According to the International Monetary Fund, at the beginning of 2019, the world had an overall inflation rate of 3.96, but there was no shortage of outliers. During 2019, Venezuela had a monthly inflation rate of more than 272,000 percent, and countries like Zimbabwe (175 percent - Tom has a $10 trillion dollar Zimbabwe note), Argentina (55 percent), and Iran (50 percent) all suffered severe economic and social distress that can last for generations.

Of course, the United States has been spared the worst tremors of hyperinflation. In the past century, inflation (aka consumer price index) spiked around 15 percent in 1979 and 6 percent in 2007-08, both economic downturn periods.

But the devilish truth about the official rates used by countries to help measure economic activity is that inflation can be quite personal and local. Personal sticker shocks for our favorite foods, gas, or activity are inevitable. Tom has not forgotten his experience as a young boy living in Italy in the early 1960s. While the official rate in Italy remained relatively low during its post-war economic boom, he witnessed regular, sometimes daily, hikes in Gelato prices at the stand stationed conveniently outside his school. No doubt many factors (labor, product, and transportation costs) were at play, but for Gelato vendors, it was a critical period likely lost in the statistical shuffle.

We don’t need to look far from home to see this phenomenon. The cost of paying for a college education rose 467 percent (or 5.14% annually) from 1985-86 to 2017-2018 school years, according to the U.S. Department of Education – or an average increase from $5,504 to pursue a Bachelor’s degree in 1985-85 to $27,357 in 2017-2018. This is personal for any family trying to fund educational goals with a finite amount of resources.

The ever-rising costs of childcare are quite personal for younger couples raising a family and have outpaced inflation for decades. According to U. S. Bureau of Labor Statistics, the cost of such care rose by 205 percent between 1990 and 2021. Childcare is a labor-intensive industry, and the costs would likely have been even higher if wages had kept up with inflation. These are costs that many lower-to-middle-income families can barely afford, if at all. The impact of escalating childcare costs can have a domino effect on family savings for college and retirement, or career (and income) advancement for women who often bear the brunt of this dilemma.

As with the cost of Italian Gelato, no one can predict with suitable accuracy just how much inflation will come our way in both the short and long term. One thing is certain: establishing and funding a plan to hedge one’s ability to confront higher costs for goods and services is the best way to deal with uncertainty.

The Sedoric Group of Steward Partners

Steward Partners Global Advisory
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