How today’s spiking inflation could impact you
Inflation is a serious problem that is getting worse. Last week, the producer price index (PPI) registered 9.6%, the worst level in 40 years. The Federal Reserve sought only “transitory” inflation of 2%, but now it is far exceeding those forecasts. When the monetary policy of the most important financial institution in the world is badly missing anticipated results, things are going awry, and bad things can happen.
Higher inflation depletes your buying power and hurts corporate earnings. Inflation is a regressive tax and it hurts people especially the 99% who are not the wealthiest 1%. Last week’s PPI demonstrates that inflation is spiraling higher, and the Federal Reserve will have to raise the Fed Fund Rate aggressively.
Leading investment professionals are rapidly and sharply raising their forecasts for Fed Funds rate hikes: JP Morgan’s Jamie Dimond expects six or seven quarter point rate hikes from its current 0 – 0.25% range; BlackRock’s Larry Fink thinks ten quarter point rate hikes lifting short term rates to 2.5%; former New York Federal Reserve Bank President, William C. Dudley, whose comments are not compromised by his corporate role, said the Fed Fund rate could rise to 4-5%. These are significant adjustments which will impact global markets. In fact, we are already seeing the stock and bond markets decline.
For nearly a decade, traders explained the stock markets relentless rise as “TINA” (“There Is No Alternative [to stocks].”) Now there will be an alternative like money markets, bank deposits, certificates of deposits, so hapless retired folk will no longer need to risk their retirement savings in the stock market. The “TINA” market is now unraveling.
“Prediction is very difficult, especially when if it’s about the future.” – Niels Bohr, Physics Nobel Laureate
How high inflation will go or when it will stop rising is hard to predict, but the Fed will be raising rates to stop the economic cost of inflation. If inflation moderates, in the coming months, then things might not be so bad and the stock market might end higher at year end.
Prepare for the worst and don’t hope for the best, particularly, if your investments cannot tolerate losses e.g. college funding, retirement savings or the purchase of a home with your investment account.
Long term rates will rise too as the Federal Reserve unloads its $10 trillion in treasuries and mortgages purchased to lift the economy. Longer term bond portfolios and bond funds could decline 40%. Unfortunately, most investors may have a false sense of security simply because they own high quality Treasury or municipal bonds. Duration risk is a risk most investors have not experienced, let alone know how to calculate.
In 1987, 10 to 30 year US Treasury bond yields rose from 7% to 10.15% by October. Ten percent Treasury bonds prompted pension plans to dump stocks en masse and lock in 10% returns for 10-30 years. That unexpected interest rate rise ultimately resulted in the October 19, 1987 stock market crash of 22% in one day!