JUST PLAIN TALK: Are current talks of inflation woes overstated?

Buz Livingston
Buz Livingston

It was time for a house painting, but the supposedly minor repairs became more extensive, much more.

Poor flashing installation was the culprit, but Hardie Plank hid the damage. Over the years, I've used the analogy of water damage behind siding to describe how inflation affects purchasing power. The damage is slow but cumulative. Mrs. Moran taught us the "Rule of 72" in seventh-grade math. I remembered but didn't appreciate it. Young and dumb, I was. Divide the inflation rate into 72, and the answer is the number of years your purchasing power will be cut in half. I should have paid more attention then. Three divided into 72 is 24 and 24 years is a good proxy for retirement: a belated thank you, Mrs. Moran.

Spurred by a 5.4% rise last July, inflation fears are on the front burner for the first time in decades. However, the calls to cool off the economy by raising interest rates ignore the reality that stalling the economic recovery is a painful solution.

Yes, prices are rising, but modest inflation, 2%, is a long-time Federal Reserve target. Moreover, much of the economy has mild inflation compared to last year. According to statistics, 2021 inflation is limited to narrow sectors most affected by the pandemic. Some parts of the economy, travel, for instance, collapsed last year then rebounded strongly. As a result, prices of airline tickets coming back to normal have an outsized impact.

Last year, people couldn't travel, so there was an increased demand for remodeling. As travel opens up, hopefully continuing, people likely will be less inclined to take on home renovation projects. Plywood and timber mills can't push a button and produce more lumber; they have physical constraints. Lumber prices have already tumbled from their highs.

While some jeered Fed Chair Jerome Powell's comments that inflation could prove to be transitory, the data appears to bolster his argument. Both the Cleveland and San Francisco Fed show modest inflation in most areas of the economy.

Powell didn't say inflation was non-existent; 2021 inflation is projected to be 4.8%. Instead, he urged caution since the same data shows 2022 inflation dropping to 2.2%. Raising interest rates will curb inflation but at the expense of higher borrowing costs and job losses. Powell is taking a prudent approach. If inflation persists, increasing interest rates is warranted, but realize the strategy is a cudgel, not a scalpel.

No one knows with any certainty the economic impact of the droughts out West and the devastation of Hurricane Ida from Louisiana to New York City. Rising COVID numbers could also thwart economic growth. Slamming the brakes with higher interest rates could send the economy into a far-worse place. Despite what you may read, we are light-years away from the dizzying inflation that gripped the economy during the '70s. Many clamoring about inflation are the same ones espousing junk science like horse dewormer for COVID.

You can't always get what you want, but Buz Livingston, CFP, can help you figure out what you need. For specific advice, visit livingstonfinancial.net or drop by 2050 West County Highway 30A, M1 Suite 230.