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  • Writer's pictureMilo F. Hanke, CFP

In Search of Goldilocks – Taming Inflation While Boosting Employment

We start and stop with good news from this past quarter.

•    inflation abates, •    stocks and bonds up,  •    banking sector is stressed but stable,•    America's income disparity lessens, and•    long-term investing keeps paying off. 

The general outlook is good or at least encouraging.  Here’s our rationale and some details …

Grateful for 5% inflation, for now.    

Latest government statistics show inflation increasing at the slowest pace since May 2021.    The Consumer Price Index (CPI) continues to decelerate from a scary 9% annualized pace recorded last summer. 

For 12 months through the end of March, the actual inflation rate came in at 5%.   That’s down from the 6% that had been measured through February.  The downward trend is now in its ninth month.  

An overheated labor market is cooling a few degrees.  New autos are again selling for less than the sticker price.  Energy prices have declined 6.4% over the past year.  Because many of us are making up for lack of leisure, airfares (call it “revenge travel”) and restaurant tabs exceed the overall 5% CPI.  

The Federal Reserve is expected to hike interest rates a bit more.  It may begin reducing rates by early next year if inflation recedes to its satisfaction.  The Fed’s maneuvers threaten a 50/50 risk of a mild recession. Even so, long-term investors need not worry so much; their long-term wealth-building in the markets will pause.  Recessions, indiscriminate as they are, serve to correct imbalances such as unsustainable real estate prices.  However, workers receiving pink slips feel the worst of the recession pain, not the investor class. 

The Fed proclaims its goal to hold inflation at 2%, a somewhat arbitrary number.  In preparing financial plans for those nearing retirement, we usually project 3.1%, the average over the last several decades.  Our policymakers aim for the “Goldilocks” rate – inflation that’s not too hot, not too cool, but moving at the right pace to steadily increase our standard of living. 

The elusive balancing act requires increased supply (goods and services) to remain ahead of demand (the amount of dollars chasing them). Thinking about long-term price trends, cheap electronics like plasma screens come to mind.  Short term, observe the fluctuations in gas prices, and before there was the cryptocurrency,  trading in Beanie Babies.

When government gets it right.

It's a miracle inflation didn’t go higher after Covid trillions-with-a-“t” were pumped into a comatose economy.   At the time, there was no vaccine, no end in sight.  Our government — as if building an airplane while in flight — improvised on a gargantuan scale to avert global economic ruin.  The inflation spike (now trending downward) may be considered collateral damage towards a larger good.  With notable exceptions such as the hospitality sector, our economy did far better than survive. 

While 5% inflation is too much for much longer, we are not returning to 1974 when inflation exceeded 12% — the “stagflation” era when President Ford wore a WIN button — “Whip Inflation Now.”  Nonetheless, the press continues to manipulate the fears of those who were there.  Today, we expect Inflation to diminish along with related scare headlines and partisan drivel.

If not properly managed, the national debt has major implications for inflation, economic growth, and national prestige and security.  The current debate over raising our nation’s debt ceiling will grow louder and could rattle financial markets.   If the debt ceiling is not raised, the inflationary cycle will be reignited, bigly.  

Debt ceiling showdowns of 2011 and 2013 led to a downgrading of Uncle Sam’s credit rating.  As a result, our government's increased borrowing costs continue to this day.  All said we predict a timely and successful resolution of the current debate.  Too much is at stake. 

Across the economy, Americans are doing better.  

As we consider all the good news, let’s dust off the JFK quote:  “A rising tide lifts all boats.”  Those on the lower rungs of the economic ladder are doing better.

According to financial analyst Steven Rattner, "Since January 2020, real (after-inflation) incomes of the bottom quartile (households earning $35,000 a year or less) have risen 7 percent, compared to 2 percent for those at the top and an average across the economy of 1.3 percent.” 

Today’s unemployment of 3.5% stands at a 50-year low.  Black unemployment has dropped to 5 percent, an all-time historic low.  The gap between Black and White unemployment seldom has been this narrow. Rattner notes, ”To put this in further historical context, in 2010, Black unemployment hit 17 percent during the financial crisis.  And in 1983, another recessionary period, it reached 21 percent.” 

The press is a limited vehicle for interpreting economic reality. Jennifer Rubin of the Washington Post writes,  “As the recovery progresses, there’s less and less justification for the drumbeat of negative hot takes and gloomy economic speculation for the media.  New York Times headlines such as ‘Unemployment Is Low.  Inflation is Falling.  But What Comes Next?’ are practically a self-parody.”  

What a difference a quarter makes! 

All broad investment categories registered positive results for the First Quarter of 2023.  They all have been down for the past 12 months.  But look at the 5- and 10-year averages; they're all positive except for the minor exception of emerging markets for the past 5 years.  (See attached Quarterly Market Review, pp. 4, 5.)  (Past performance is not a guarantee of future results.) 

Indicative of easing inflationary pressure, the subcategory of commodities showed losses for the quarter and the past year.  Worse for that volatile asset class, commodities like coffee beans, metals, cotton, and oil constituted a loser for the past decade, dropping 1.72 annually (source: Bloomberg Commodities Total Return Index).  

Looking ahead. 

When the unexpected happens, many investors feel like they should be doing something with their portfolios.  Often, headlines and pundits stoke these sentiments with more doom and gloom predictions. For the long-term investor, however, planning for what can happen is far more powerful than trying to predict what will happen.

Our clients' power source is a long-term, diversified strategy to support their lifestyles and aspirations. We welcome the opportunity to review your investment strategy and any financial planning questions you may have.

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