Insights Regarding Inflation

An economic reality on the minds of many these days is inflation.  Due to a worldwide pandemic, our economy was largely shut down.  Subsequently, money was distributed to the American people to avoid recession.  Now the challenge is that as demand returns, the supply has been restricted due to operations being closed.  60 Minutes did a special highlighting this situation on 11/14/21. Reporters onsite at the ports of Long Beach and Los Angeles filmed the overabundance of containers full of goods on huge vessels awaiting trucks to unload them for delivery.  As truckers return to port to unload an empty container and take another full container out for delivery, there is no space for them to unload the empty container at the port. The trucks with empty containers must take them to lots throughout southern California.  This cycle is causing delays in delivery.  It is understandable then, that this increased demand and restricted supply has created the environment for inflation.

For some, memories of the high inflation our country experienced in the late 70s, and especially early 80s, are concerning.  The following chart shows the Social Security cost of living adjustments and the Fed Funds rates during the years of 1975 through 1982.  

Source: Board of Governors of the Federal Reserve System (US). https://www.federalreserve.gov/; Cost-of-Living Adjustment (COLA) Information. https://www.ssa.gov/cola/

Some of you have been asking, are we doing anything different with our portfolio considering inflation?  We believe history also shows that having an appropriate amount in equities, suited to the investors’ time horizon, is the right place to be.  Following is a graph of the Vanguard Wellington Admiral fund, symbol VWENX.  We selected this fund because it has good data enabling us to track performance back to the early 1970s.  The annualized return of that fund between 1/1/1975 and 12/31/1982 is 13.6%. 


From the Federal Reserve’s website, “Congress has assigned the Fed to conduct the nation’s monetary policy to support the goals of maximum employment, stable prices, and moderate long-term interest rates. When prices are stable, long-term interest rates remain at moderate levels, so the goals of price stability and moderate long-term interest rates go together. As a result, the goals of maximum employment and stable prices are often referred to as the Fed’s ‘dual mandate’.” Chairman Powell has indicated after their most recent meeting they will be employing tools to slow the flow of cash into the economy and subsequently to raise interest rates soon.  It is the hope these supply chain issues are resolved and the Fed’s policies help to maintain price stability, but it is also reassuring to know, based on history, that in these environments, equities hold up well as a part of a long-term financial plan.

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