Are Inflation Fears The Pandemic Anxiety Replacement?

If the word of the year was “pandemic” in 2020 and “vaccination” in 2021, let’s hope it’s not “inflation” in 2022. The annual inflation rate accelerated to 7% in December 2021 - a level we haven’t seen since June of 1982. When you consider that fully half of the current US population had not yet been born in 1982, it should be no surprise that topic is unchartered territory not only for many clients, but for many younger advisors as well. A number of us who endured the double digit inflation of the 70’s, and the stagflation that followed, have been sounding the alarm that our current course feels all too familiar. And no matter which combination you believe contributed to the situation in the 70’s (excessive government spending, liberal monetary policy or the oil shortage caused by Arab and Iranian oil embargos), we see similar themes today with pandemic-related stimulus, unprecedented growth in the money supply, and supply chain disruptions wreaking havoc in industries like semiconductors and thus autos.

But the Fed seems to be ready to respond, having already slowed purchases of Treasury Bonds and mortgage-backed securities. And Federal Reserve Chairman Jerome Powell is expected to begin tightening monetary policy as soon as March – a move President Biden announced public support for just last week, in his first news conference of the new year.

Despite growing inflation concerns, consumer confidence has remained high and employer hiring has continued to put upward pressure on wages. A Conference Board Survey last November indicated employers planned to bump wages by nearly 4% in 2022 – the highest increase since 2008--but it remains to be seen whether we’ll see inflation numbers continue to climb, more than eroding the wage gains forced by a brutally competitive war for talent.

In preparing for the worst, there are many inflation-hedging strategies advisors can discuss with clients who are concerned that we’re headed for inflation numbers reminiscent of the 70’s. But perhaps the most critical role an advisor can play is to ensure clients do not panic.

So as the saying goes, Keep Calm and Carry On.

But you might want to dig out your bell bottoms… just in case.