3 minute read
Hook, Line & Sinker
from The Shores Magazine
by towar
PLANNING Financial
Four Forces Preventing a Return to 1970s Infl ation
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BY JEFFREY BRAYTON
My of ice is near the intersection of Jefferson and Marter, giving me easy access to Kroger where I spend a fair amount of time walking the aisles in search of lunch or just getting some exercise during the winter. It’s impossible not to notice the prices increasing on everything from fruit to frozen pizza. We are all experiencing in lation together (more the frozen pizza than fruit for me). In lation has become a real concern.
This chart illustrates exactly how devastating in lation can be to our purchasing power. An annual in lation rate of just 2% will erode your purchasing power by 18% over 10 years and 55% over 40 years.
The question has changed from “will in lation increase?” to “how high it will it run and for how long?” There are “experts” warning us we are in for 1970s hyper-in lation. In addition to questionable fashion choices, the 1970s are remembered as a decade of high in lation. The truth is that we have no idea how high and for how long in lation will run.
What we do know is that in lation has been low for several decades. Fortunately, the longer-term forces which have kept in lation low are still in place. These four forces should help to contain in lation in the years ahead.
1) Demographics. Many regions of our world, including the U.S., China, Japan and Europe have aging populations. Economies with older citizens tend to grow at slower rates with higher savings. This is antiin lationary. 2) Globalization. The economic law of comparative advantage is not always favorable, but it does a good job of keeping overall prices low with capital lowing to low cost producing nations.
Spending Power Lost with Infl ation ANNUAL INFLATION
YEARS
0% 2% 4% 6% 8% 10% 3.10%
10 0% 18% 32% 44% 54% 61% 26% 20 0% 33% 54% 69% 79% 85% 46% 30 0% 45% 69% 83% 90% 94% 60% 40 0% 55% 79% 90% 95% 98% 71%
Source: Analysis by Wealth Logic
3) Technology & Innovation. Increasing prices create incentives for competition. Technology speeds the development of competing products and services and their delivery. You may be familiar with Amazon? 4) Decline of Organized Labor. Private sector union membership has declined from a peak of 34.8% in 1954 to just over 6% today (Source: WST). Labor unions were once a signi icant driver of higher wages, and thus in lation.
I hope this list helps to calm your nerves the next time you hear someone hysterically telling you that we are going to experience the hyper-in lation of the 1970s all over again. I’ve been in this business long enough to never say never, but frankly I think there’s a better chance of Pet Rocks and disco coming back. Groovy, huh?
Jeffrey Brayton is a graduate of the University of Michigan and has an MBA from Wayne State University. He is the co-owner of Lakeshore Financial Planning in St. Clair Shores and has spent the last 29 years helping individuals and families clarify and work toward achieving their unique inancial goals.
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