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Another Month of “Transitory” Inflation

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Consumer prices rise yet again … is persistent inflation threatening to increase the timing of a rate hike? … Social Security recipients get a big bump

 

We’re approaching the holiday season, which means it’s time to get ready for friends and family overstaying their welcome.

To help us prepare for that, yesterday, we learned that “transitory inflation” has decided to extend its visit for yet another month.

From CNBC:

The consumer price index for all items rose 0.4% for the month, compared with the 0.3% Dow Jones estimate.

On a year-over-year basis, prices increased 5.4% versus the estimate for 5.3% and the highest since January 1991.

Gas prices climbed another 1.2% for the month. That brings the annual increase to more than 42%.

And if your grocery bill seems larger, that’s because it is. Food at home prices rose 1.2% for the month. Meat prices climbed 3.3% and are now up 12.6% year over year.

Now, on one hand, the rate at which inflation is climbing has been slowing down.

On that note, here’s our hypergrowth specialist and the editor of Hypergrowth Investing, Luke Lango:

The reality here is that inflation was red-hot in April, May, and June, when core CPI was rising by 0.7% to 0.9% every month.

However, since then, core CPI growth has slowed to a crawl, rising by just 0.1% to 0.3% every month, as supply chains have gradually been restored and price pressures have eased.

On the other hand, this bout of excess inflation is proving hard to shake.

On Tuesday, Atlanta Federal Reserve President Raphael Bostic broke rank with Fed central leadership, saying that this inflation “will not be brief.”

From MarketWatch:

The bank’s most recent statement on monetary policy also referred once again to “transitory factors,” though Powell himself recently admitted for the first time that inflation is likely to remain high well into next year.

Bostic said he and his staff will no longer refer to inflation as “transitory” because the current “episode” of inflation could persist for quite a while, perhaps well into 2022 or beyond.

***This whole “transitory” concept is frustrating, because there’s no limiting factor

So, inflation will be transitory?

Fine. But everything is transitory.

That description camouflages how long inflation can stick around, doing all sorts of damage before it moves on.

It’s a bit like the stock market bear who spent 2015 and onward predicting a coming crash.

As stocks continued rising, creating huge wealth for investors, the bear clung to his talking points about those gains being unjustified and bubble-ish, and just a precursor to the meltdown.

Finally – years later – when the market fell in 2020, this bear claims victory.

“See! I was right all along! The market crashed, just as I predicted!”

Yes. You nailed it.

In the same way, sure, this inflation will eventually prove transitory…just as the inflation that ravaged the 1970s proved transitory.

In the meantime, it’s eroding wealth.

***The greater worry is that its persistence threatens to accelerate the timing of an interest rate hike

From The Wall Street Journal:

All year the Federal Reserve’s message on inflation has been consistent: This year’s surge is transitory, and inflation will soon return close to the central bank’s 2% target.

Yet look more closely, and it is clear officials are turning less sanguine—and that explains growing eagerness to start raising interest rates…

The message from the Fed’s latest projections is that “transitory” is lasting an awfully long time.

Indeed, next year’s projected 2.3% is the highest next-year core inflation forecast since projections were first published in 2007, according to Derek Tang of Monetary Policy Analytics.

If we look closer at the Fed’s attitudes toward a rate hike, we see a shift.

Half of Fed officials now believe rates will begin rising by late 2022. Compare that to last March, when a majority of officials didn’t see that happening until all the way out in 2024.

This change of heart isn’t because the economic outlook is stronger. In fact, two days ago, Goldman Sachs cut its U.S. economic growth target to 5.6% for 2021 and 4% for 2022.

The change – at least in part – reflects the risk of lingering inflation.

In fact, earlier this week, the International Monetary Fund (IMF) warned that central banks around the world should be prepared to tighten monetary policy if inflation gets too ugly.

The IMF softened its statement by giving a hat-tip to “transitory,” but the message was clear – be prepared to act if this doesn’t go away.

From Gita Gopinath, the IMF’s economic counselor and director of research:

While monetary policy can generally look through transitory increases in inflation, central banks should be prepared to act quickly if the risks of rising inflation expectations become more material in this uncharted recovery.

***So, what can you do to protect your wealth if things do grow worse?

Simple. Move a substantial portion out of your wealth into hard assets.

There’s bitcoin and top-tier altcoins…

There are the stocks of high-quality businesses that have the ability to raise their prices to match inflation…

There’s real estate… commodities… precious metals (even though gold has been weak) …

There are even collectibles – coins, wine, vintage cars, artwork, and now NFTs…

There are many assets that will do the trick, but they all do the same thing – increase in value alongside inflation.

Bottom-line, this unwelcomed visitor isn’t taking the hint and packing its bags. Make sure you’re prepared for a longer stay.

***Meanwhile, Social Security benefits just popped – which is another reason why younger investors shouldn’t plan on it being in good shape when they retire

Yesterday, we learned that those collecting Social Security received a 5.9% cost-of-living adjustment (COLA) as a side-effect of inflation. That’s the largest bump in 40 years.

From MarketWatch:

Cost-of-living adjustments are based on formula tied to the consumer price index. The government made it official after the release of September CPI report.

The average Social Security beneficiary receives about $1,565 a month this year. The scheduled 5.9% increase in 2022 would amount to $92 a month — or $1,104 extra over a full year.

That works out to $1657 a month for the average retiree.

Almost 70 million people have received Social Security or related benefits in 2021. That’s roughly one-fifth of the U.S. population.

With this many people receiving Social Security, and the amount of their checks rising 5.9%, that’s not good for Social Security’s long-term solvency.

In fact, even before this COLA increase, younger Americans expecting to receive full benefits in retirement were not being realistic.

From NPR in early September:

The sharp shock of the coronavirus recession pushed Social Security a year closer to insolvency…

The new projections in the annual Social Security and Medicare trustees reports indicate that Social Security’s massive trust fund will be unable to pay full benefits in 2034 instead of last year’s estimated exhaustion date of 2035.

For the first time in 39 years the cost of delivering benefits will exceed the program’s total income from payroll tax collections and interest during this year.

From here on, Social Security will be tapping its savings to pay full benefits.

Increasing those benefits by 5.9% will only accelerate this timetable.

If you’re a younger investor, wondering what the damage will be when you’re in retirement, it’s currently expected that a financially-distressed Social Security program will be able to pay just 78% of scheduled benefits.

You might say that enjoying full benefits is “transitory.”

Let’s hope not.

Have a good evening,

Jeff Remsburg

The post Another Month of “Transitory” Inflation appeared first on InvestorPlace.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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