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Holiday shopping with inflation

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By Joel Dresang

At a pre-holiday gathering of extended family, I heard several comments that echoed what I’d been reading about, a topic we’d been discussing at work: Rising prices.

Inflation is always an issue. No one likes paying more. Prices are pretty much always going up. That makes inflation a perennial point of complaint and a hot button for political candidates.

“Oftentimes we’ve seen if a politician doesn’t like the way Congress is spending money, they scream, ‘Inflation!’ We saw that 10 years ago. We saw that this past winter,” Bob Landaas said in the 2021 Investment Outlook Seminar. “So I think it’s important for investors to focus on the canary in the coal mine. Look at the yield on the 10-year Treasury. If the yields start zooming, get nervous. You’ve got a problem.”

So far, yields have not been zooming. The 10-year Treasury ranged between about 0.9% and 1.7% in 2021. That contrasts with averages of 2.3% since the Great Recession that ended in 2009 and 6% since 1962.

“Follow the financial markets,” Bob said. “If big money was getting nervous about inflation, I would suspect that the yield on the 10-year would be quite a bit higher.”

Inflation matters to investors because it can drive interest rates higher, and higher rates can make stocks look less attractive.

And there’s no denying that inflation overall has been high.

The broadest measure of inflation, the Consumer Price Index, rose 6.8% in the 12 months since last November. That’s the biggest increase since June 1982. The index of personal consumption spending, preferred by the Federal Reserve Board, showed annual inflation at 5.7% in November, the highest since July 1982.

With inflation at its briskest pace in 40 years, economists have been puzzling over how long it will last and how it will affect the economy. Consumer spending drives about 70% of the U.S. gross domestic product, and inflation can stifle that by scaring consumers about running out of money.

Getting back to my family, although I recall complaints about prices, I didn’t hear conversations about purchases that weren’t made because of high costs. Indeed, early indicators suggest 40-year high inflation didn’t dent holiday sales. For instance:

  • The Commerce Department reported record retail sales of $640 billion in November. Sales include price increases, but the year-to-year growth of 18.2% far exceeded overall inflation.
  • Merchants are still counting receipts, but the National Retail Federation forecast the 2021 holidays to bring in record sales between $843 billion and $859 billion, excluding car dealers, gas stations and restaurants. “Consumers’ financial condition remains healthy,” John Kleinhenz, the trade group’s chief economist, said in a news release, “and neither stubborn inflation nor COVID-19 appear to have derailed holiday spending despite both being top of mind.”
  • Consumer confidence trumped concerns about both inflation and the omicron variant in December, the Conference Board reported 22, with rising proportions planning to buy houses, cars, large appliances and vacations in the next six months.

Mark Zandi, chief economist at Moody’s Analytics, has categorized the 2021 holiday season as a “boom time” for spending and told NPR recently that the level of overall consumer spending “is about where you would have expected it had there not been a pandemic.”

As I wrote a couple of months ago, all the commotion over inflation hyped by supply-chain bottlenecks had me worried about fulfilling my end of the family gift exchange. I was so concerned that I did my holiday shopping earlier than usual. And the extra time allowed me to stumble onto bargains.

For instance, my daughter’s wish list included a Toni Morrison novel, which I got at a huge discount at a used bookstore. The pine-scented candle on her list I found on sale at a supermarket. She also asked for a watering can, and I got a cheap one that exceeded her expectations from a local hardware store.

My shopping experience reminded me that while inflation measures the increase in prices, it can exaggerate how high prices really are – thus inflating the impact of inflation.

Other Money Talk articles from Joel Dresang

For instance, every year, the American Farm Bureau Federation releases the cost of a typical Thanksgiving dinner for 10. The cost in 2021 was $53.31, up 14% from 2020. While 14% in one year is a lot, it’s up only 9% from 2018. That’s because the cost of Thanksgiving dinner rose just a penny in 2019 and actually fell by 4% in 2020, according to past Farm Bureau reports.

Of course, it’s too soon to say inflation will not be the problem we’ve been warned about for more than a decade. Nobel laureate economist Paul Krugman recently acknowledged that although he expects inflation to be short-lived, it’s already drawn out longer than he had anticipated. And it’s fair to say we’re in peculiar times, which can make even the most decorated forecasters look foolish.

The bottom line for investors is to remain balanced and keep an eye on the 10-year Treasury yield.

“It’s pretty interesting that the big money doesn’t feel like inflation is much of an issue,” Bob Landaas said on a recent Money Talk Podcast.

“The big money is clearly showing that maybe we’ll get two rate increases next year, maybe three,” Bob said. “And I feel in the intermediate term, that’ll serve as fundamental support for stock prices.”

Learn more
Inflation: Nuances matter for investors, by Kyle Tetting
Yuletide logjams: Economy hits holidays, by Joel Dresang
Uneven recovery suggests balance, by Kyle Tetting
Stocks offset fears of inflation over time, by Joel Dresang
Stocks: Long-term, consistent returns, a Money Talk Video with Dave Sandstrom
Key economic indicators every investor should know, from the Financial Industry Regulatory Authority
(initially posted January 6, 2022)

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