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Stocks offset fears of inflation over time


By Joel Dresang

For years, Americans have harbored outsized fears of inflation. Not that concerns are unfounded. Like most variables that investors weigh, inflation cannot reliably be forecast.

“We really can’t time these things and predict when the winds might shift,” Brian Kilb explained in a recent Money Talk Podcast.

Like a sheer gust on a calm lake, a swift spike in living costs can upend unprepared retirees. Without warning, they can face expense increases that threaten their limited-income budgets.

In recent years, though, inflation has failed to live up to its hype. Ongoing surveys by the University of Michigan show consumers overestimating inflation levels every year since 2006.

Speculative headlines have warned of imminent inflation since U.S. government efforts to bail out the economy after the 2008 financial collapse. Trillions of dollars of federal stimulus since the COVID-19 pandemic has further fanned fears of inflation.

Economist Milton Friedman is credited for saying inflation is too much money chasing too few goods, and pundits have worried that the Federal Reserve has been pumping out too much money.

“One of the logical concerns, and it was a concern post financial crisis, is that the amount of money that’s poured in means that inflation is just around the corner,” Kyle Tetting said in the podcast. “And I think, as we learned post financial crisis, that money pooled on balance sheets, as it’s doing now. That money flowed to those people who weren’t going to spend anytime soon because they were waiting for more certainty. And that certainty never necessarily arrived in the way that we thought it would.”


  • Measures of consumer spending, which accounts for more than two-thirds of U.S. economic activity, show individuals holding onto their money. Though they’ve recovered some ground as quarantines began relaxing in May, consumer expenditures are down nearly $680 billion or 5% since the pandemic.
  • Personal savings have been off the charts, reaching as high as 33.7% in April.
  • Inflation, meanwhile, remains stalled. The Fed has identified 2% as the sweet spot for sustainability—high enough so the economy grows, low enough to keep consumers spending. The latest reading of the Fed’s favorite measure of inflation was 1.3%, in July. The last time the indicator got to 2% was in 2018; before that, it was 2012.
  • The capacity utilization rate is an early-warning number for inflation. If industries are running out of room for production, they need to raise prices to build more capacity. Since 1972, the average rate is 79.8%. In July, it was 70.6%. The last time it neared the average was in 2008.

“The short answer is we’re just not seeing those inflationary pressures,” Kyle said.

Still, investors—especially those who are retired—wonder about inflation and how they’re positioned to deal with it when it eventually comes.

“The best inflation protector is going to be stocks,” Steve Giles said in the podcast.

“If you want to outpace inflation longer term, build a diversified portfolio of stocks and stock mutual funds.”

Although inflation requires retirees to stretch their money further, it also offers businesses opportunities to increase prices, which can help earnings, which rewards stockholders.

“It may not be the way we’d hope for (businesses) to grow earnings,” Kyle said, “but it’s one more component of how, long-term, you can grow earnings and make those stocks a little bit more attractive.”

Stocks are considered riskier than fixed-income investments, but in a balanced portfolio, they play the role of helping keep up with inflation, Brian explained.

“There’s a reason you don’t want to be overly cautious right now,” Brian said. “I’m all for hunkering down and keeping it close to the vest for a while, but there are problems you create in being overly cautious as well. I think the idea that inflation might creep up sooner than later certainly would be one of those reasons why you wouldn’t want to be overly cautious.”

Steve said he has clients who fund their retirements partly by pensions, but such fixed benefits don’t rise with inflation. Stocks growing among their investments allow them to ask for a raise every year “because their portfolio has increased in value, because they have seen compounded returns,” Steve said. “That alone is the biggest argument for having stocks as a way to outpace inflation.”

“Let’s be honest,” Kyle added. “I don’t think any of us are calling for inflation any time soon. I think the saving grace to all of this is we don’t have to be right on what the inflation rate is, and we don’t have to be right on when it shows up. We just have to be right that the tools we have available to us are sufficient to overcome whatever those pressures are.

“The ability to keep a significant portion of your portfolio in stocks,” Kyle said, “is more than you’re going to need to be able to keep pace with those inflationary pressures.”

Joel Dresang is vice president-communications at Landaas & Company.

Learn more
Keeping balance in unnerving times, by Bob Landaas
Stocks: Long-term, consistent returns, a Money Talk Video with Dave Sandstrom
Low expectations for Social Security raise, by Joel Dresang
Talking Money: The importance of balance, a Money Talk Video
(initially posted September 4, 2020)

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