We'll need to get to know you if we're going to join forces. To expedite that process, click the link below that best describes you.

Get Our Newsletter

Form Example

What Does Inflation Mean to You?


Sloane Ortel

Founder and Chief Investment Officer of Ethical Capital.

Inflation has been an obscure economic phenomenon for most of my life. There has been plenty of academic discussion, but it hasn’t crossed over into mainstream economic and political discourse.

Until recently.

Pandemic-induced supply chain shocks have coupled with Russia’s war of aggression and the associated volatility in world energy markets to put it front and center in “kitchen table” economic discussions.

Which is a polite way of saying that people are worried about it.

I can see why.

Traditionally, analysts ignore inflation in energy and food prices (which are quite volatile) and focus on “core inflation” which is designed to measure the other stuff in our day to day life. Things like medical care, apparel, education, and services.

As the chart below from the United States Bureau of Labor Statistics shows, those prices have spiked after almost two decades of stability.

What does this mean?

And more importantly, how can we expect it to manifest in the broader economy?

There is no shortage of scary stories about the ravages of inflation. Countries like Zimbabwe, Argentina, and Turkey have been indelibly shaped by it for most of the period shown in the chart above. We’ve heard of people who make a habit of going to the grocery store first thing in the morning because prices increase every afternoon and princes made into paupers by the mass devaluation of currency.

Is that what we have to look forward to?

At a high level, I don’t think so.

And I think that the general discussion about inflation in our economy has obscured some basic questions of fairness that should be of interest to anyone with a progressive political bent. But I want to make sure that we’re all on the same page. So let’s clarify some terms before we dive into what we can reasonably expect in the future.

What is inflation?

The Oxford English Dictionary defines inflation as:

A general increase in prices and fall in the purchasing value of money.

That’s not so complex! Prices up, value of money down. But a declining value of money doesn’t exactly create warm and fuzzy feelings in anyone’s hearts. Instead, it tends to create panic, since most people aren’t used to thinking of the dollars in their wallet as something that fluctuates in value.

That’s because unless you’re sending money overseas, traveling, or making a big-ticket purchase from another country, fluctuations in the value of the dollar don’t mean very much to you. They show up in the price of things you buy day-to-day, but generally speaking the fluctuations outside of food and energy prices are digested by the time they reach you that you barely perceive them.

How is inflation measured?

In the United States, the benchmark measure of inflation is produced by the Bureau of Labor Statistics. They’ve created a metric called the Consumer Price Index (CPI), which is designed to measure the prices that consumers pay for certain goods and services.

It’s important to underline that we’re talking about consumers as a whole here, not you in particular. For instance, vegans have generally been insulated by recent rises in the price of meat, poultry, fish, and eggs. So our personal experiences of inflation may be quite different from what’s described in the CPI.

That’s doubly true for folks who live outside of big cities. The CPI is designed to measure price changes for urban consumers, and doesn’t generally do a good job tracking the experiences of people in Rural America who often have lower incomes, greater day-to-day reliance on oil and gas, and labor markets that are slower to adjust for rising wages.

Is inflation good or bad?

Inflation is just one component of our economic ecosystem, which makes it difficult to analyze in isolation. With that said, many economic commentators have not hesitated to characterize it as a scourge. That’s because it reduces the value of certain assets, like cash held in bank accounts, in a way that’s quite scary to seniors and other folks who live on fixed incomes.

But it also creates jobs. It’s not a coincidence that inflation is flaring up at the same time as the US unemployment rate is drawing closer to pre-pandemic levels. This relationship is so central to our economy that the US Federal Reserve’s mandate is to promote both “maximum employment” and “stable prices.”

This effectively acknowledges a direct link between the recent “great resignation” which has featured all sorts of employees leaving their jobs for better pay, more flexibility, or long-term career opportunities and the rise we’ve seen in inflation rates. One begets the other. So it would be quite difficult to issue an accurate blanket characterization of it as good or bad because at some level, it’s both.

That doesn’t seem to stop people.

There seems to be an army of right-wing zealots ready to pounce on every inflation-related datapoint in an attempt to spread fear, uncertainty, and doubt about the long-term stability of our economy. In many cases, these pundits have been making the same case for years without regard to the evidence. And in my judgment, you would be well served by ignoring them. A well-diversified portfolio of stocks (such as the sort that we build for our clients) is widely seen as the best way to preserve the value of your wealth over long time horizons.

What’s the relationship between debt and inflation?

The mainstream discussion about inflation tends to overlook something crucial: many Americans are in significant amounts of debt. I’m talking less about mortgages here than credit cards, student loans, and medical debts that often come with high interest rates and target some of our poorest populations.

This probably doesn’t come as news, since at this point almost everyone has a friend or loved one that has been touched by this personally. A recent Liberty Street Economics analysis published by the New York Federal Reserve found that Black, Hispanic, and Female college graduates were much more likely than other graduates to still be carrying student loan debt at age thirty.

This means that those graduates effectively had their earnings reduced by the cost of carrying their student loan debt. And because inflation reduces the cost of paying back those debts, its recent rise may wind up reducing the burden that these borrowers are set to bear in the coming years.

Of course, it’s nothing compared to just cancelling the loans outright or enacting broader-scale economic justice reforms. But we’ll have to leave those topics for another time. Feel free to reach out to us if you don’t feel like waiting, though.

What’s the best way to protect my assets from inflation?

Most well-diversified portfolios are designed to protect the value of your assets over time, but some do a better job of that than others. As a general rule, companies with strong pricing power are the best situated to navigate an extended inflationary environment. Investments in tangible assets, like real estate and infrastructure, should also be expected to hold up well.

The strategies we manage here are designed with this in mind, and tend to hold larger-than-average concentrations of real estate and electric utilities. Our due diligence process also evaluates a company’s degree of pricing power, which is a fancy way of saying that we take inflation extremely seriously.

Anyone concerned with inflation should also consider owning some I Bonds. Issued by the US Treasury, these are special savings bonds that automatically adjust their interest rates to account for inflation. That means that whether inflation rises or falls, you can rest assured that your I bond holdings will retain their purchasing power.

The primary drawback with I Bonds is that you can only purchase $15,000 worth of them in each calendar year. They also withhold a few months of interest if you sell the bonds within five years of purchase, but the yields are so much better than most other savings products that they are still a compelling option for many use cases. You can click here to open a TreasuryDirect account and get started.

If you liked this post, let's keep in touch!