Remember “WIN”—for "whip inflation now"—buttons from the 1970s? This week's news about the Consumer Price Index—it rose 7 % over the last 12 months, the highest level in 40 years—stirs memories for many clients of runaway inflation, high unemployment, gas lines, and double-digit interest rates.
Those clients are now in, or near, retirement. You can almost see fear well up in their throats as the news of inflation worsens. They experienced what inflation inflicted on the economy as they looked for jobs, tried to buy their first homes, or sought financing to start a business.
And now it’s time for advice on how they can ride out an inflationary period, whatever the duration, while preserving as much as possible for retirement income.
Heard This Joke About Economists?
Q: Why can't two economists from different schools of thought ever agree?
A: They're debating from different premises.
Economists disagree on whether inflation in the United States is temporary or permanent. Experts like Paul Krugman believe inflation has been caused primarily by the economic ravages of the pandemic—supply chain disruptions and shortages, chip shortages and the like—and is temporary.
Other experts, including my cousin Larry Summers, believe higher inflation may be permanent. They think the government provided too much stimulus in response to the pandemic and that increased wages and low unemployment will sustain an inflationary period of some length.
Whatever the next 12+ months have in store, inflation has diverse effects on households depending on their investments and financial well-being.
What's An Investor To Do?
The real monster in the room is taxes.
For bondholders, permanent inflation would decrease returns because they'll pay taxes on higher yields. However, higher yields could attract some reallocation of assets to bonds and bond funds.
For stockholders, the outlook is unpredictable. They have benefited from the robust economy of the past three years. Permanent inflation, however, could complicate corporate revenues, taxes and earnings. And stockholders will eventually be taxed on gains associated with higher inflation.