Understanding Inflation: Past, Present, and Future Perspectives

Grocery prices have increased by 25% over the past four years, impacting families everywhere who are facing significant challenges in managing their monthly expenses

In this week’s episode of Retire in Texas, Darryl Lyons dives deep into the complexities of inflation and its profound impact on households today. Gain valuable insights and practical strategies to navigate rising costs and safeguard your financial future in an evolving economic landscape.

Show highlights include:

*A discussion of the real impact of inflation on everyday life.

*A breakdown of inflation from past causes to present effects and future considerations.

*An explanation of government metrics like CPI (Consumer Price Index) and PCE (Personal Consumption Expenditures) used to measure inflation and why food and energy are sometimes excluded from these indices.

*Advice tailored to various groups affected by inflation, including those on fixed incomes, individuals with some financial flexibility, and retirees.

*Why owning stocks can be a strategy to mitigate inflation’s impact, as companies can adjust prices to maintain profit margins.

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Hey, this is Darryl Lyons, CEO and co-founder of PAX Financial Group. Thanks for tuning in to Retire in Texas. This information is general nature only. It’s not intended to provide specific investment, tax, or legal advice. Visit PAXFinancialGroup.com for more information. And also visit PAXFinancialGroup.com, go in the upper right hand corner there’s a contact us button.

You can do that if you want to meet with an advisor. 15 minute, heart of a teacher conversation just to see if it’s a good fit. Whether you’re ready or not, we’ll be happy to help you. Okay, so I’ve gotten multiple requests for inflation conversation. So, here we are. We’re going to talk about inflation. Don’t tune out, I’m going to actually make it very relevant.

So you need to know what’s happening with inflation. Just recently heard a story. Let’s call her Heidi, a mother of five boys. And true story, families monthly spending on groceries went from $2200 to $3000 a month. $2200 to $3000 a month. It’s 800 bucks a month. Now, to spend $800, you probably have to make $1,000. Pay taxes.

The net $800. Thousand dollars a month. More. Times 12 is $12,000 more in income. Heidi’s not getting $12,000 more in income. So, where does this come from? Where does this magical money come from to pay for these groceries? This is happening to all of us. Not just Heidi, to all of us. This is inflation. Now, I’m almost embarrassed to tell this story, but when early in my career, early 20s, I had read all the, you know, I had education in finance.

I’d read the history in the markets. I knew about Jimmy Carter. I knew about interest rates. I knew about inflation. I had studied it. As I’m doing financial modeling for clients early in my career, we would use inflation as a way to encourage people to invest. And my skepticism thought I couldn’t help but think this so forgive me, that it was a manufactured threat so people would buy financial products.

And I’m in the industry. I’m just skeptical of my industry. And so I’m running, modeling, going, yeah, I know we put inflation in there and I know it’s talked about in the books, but I really hadn’t experienced it. So for me, I thought it was a ploy. I thought it was a ploy for people to just invest. So that sat in the back of my mind for a long time, despite my academic training.

I mean, I know this, I’ve read this stuff. I’ve learned history. Like I still thought it was a ploy by the financial industry, but I, I set my skepticism aside because the reality is I knew that was a reality. And here we are dealing with it. I think we’re all believers now. Some of my baby boomer friends are saying, “I told you so. I remember Jimmy Carter. I remember my mortgage 18%.”

Here we are dissecting inflation and the reality that it does exist. So, I’m going to unpack inflation from a past, present, and future point of view. It reminds me of the joke: the past, the present, and the future all went into a room at the same time, and then things got a little tense. 

I’ll give you a second to figure that one out. It is a dad joke. So, let’s jump into the past. How do we get here? How did we even get in this inflation spot? There’s a number of reasons we got here. First of all, there are elements of our inflation that were birthed out of the supply chain bottlenecks into 2021. So for example, if you had a car manufacturer that said I got to sell cars and I don’t care what it takes to get me an airbag, I know it’s stuck in the Pacific Ocean off the Los Angeles coastline.

I don’t care. Whatever it takes to get me that airbag. That’s what I need to sell the car. And so they pay more for that airbag. And guess what happens to the price of airbags? They go up. Or Amazon? Amazon gets all nervous about these social pressures and all these people raising their pitchforks about not getting paid enough. So they raise wages and Walmart does the same. Costco. Everyone raises the price that they’re willing to pay employees.

You do that enough. And guess what happens? Prices go up. Probably the biggest culprit of inflation is when the United States flew a helicopter over the country and up and dropped dollar bills, and this is called quantitative easing. And it didn’t just affect the United States. It affected the whole world because everybody had a little bit more money to spend.

And Starbucks knew that. So, prices went up. And up and up. And groceries went up 25% over the past four years. And Heidi and her boys are trying to figure out how to do it. So, that’s how we got here. To what degree? All of those variables in those inputs, played a role in where we’re at today.

I really don’t know. I’d say the latter one was probably the biggest culprit, but I really don’t know. All of them played a role. So, how do we deal with it in our current situations? First of all, inflation is not going down. If you hear somebody say inflation is going down, they are wrong. It is slowing down, slowing down. There’s a difference. 

So imagine that your groceries and your paycheck are in a race. They’re on a track, high school track. It’s 800m around or 400m around. And groceries have a huge, a monstrous head start. Like they’re halfway around the track in this race before the gun is shot. And then today, inflation has gone down from 9%. It’s running about 3%. So now, wages are running at the same pace as groceries. But groceries are still very far ahead.

And so, yes inflation slowed down from 9% to 3%, but they’re not going down. The government watches this very closely, the Federal Reserve specifically. A lot of people hear of CPI, that’s the Consumer Price Index. But the Federal Reserve looks at PCE, it’s a consumer expenditure index. And, they like to use that one versus the CPI, PCE versus CPI, because it has a broader, a broader way of looking at it. Without getting into the details, it’s just, it’s broader. A little bit more accurate, they figure. But it’s pretty darn close. If you look at historically, there’s just a little bit of difference between the two but not huge. 

And then of course, they break that down into what they consider the headline number, which is what we see whenever we turn on the news. But then there’s another number that excludes food and energy. And I’ve had so many people yell at me, “why do they exclude food and energy?” I don’t know anybody that can do life without food and energy. Well, they do that. They want to look at both, but they do that because sometimes if you put food in the, if you look at this number with food in it, it can be impacted by weather.

So if there’s a drought somewhere and it impacts food, it can throw off the numbers. So this allows, having both of them, allows you to look at inflation independent of certain geopolitical events. When it comes to energy that could be OPEC stuff, but also droughts and weather conditions that can cause a lot of variability in food prices.

So, they like to look at both. One’s headline and one’s excluding food and energy. So, that way it is a smoother number to look at. Now, if ultimately food and energy work their way into all consumption, generally speaking. But by taking it out, you just remove that variability. So PCE is the one that the government looks at. And what they’re realizing when they look at that is that inflation is very, very stubborn.

Again, it’s not going down. It is slowing down. Well, why is it so stubborn? Well, a couple reasons or a few reasons. One, people are using their credit cards. We’re just not good at slowing down our purchases. We’ve got habits, and we’re going to stick to those habits. If we want a Starbucks at [2:00] in the afternoon, we’re going to get a Starbucks.

And so, if we don’t have the money, we just, Visa will pick it up. And so credit cards are going up. Savings accounts are going down. So have it. There’s not been a pain point for the consumer, generally speaking, with inflation. There hasn’t been a pain point because we’ve just decided to use our credit cards or savings to make up for this increase in grocery costs.

So, that’s huge. The other reason it hasn’t, it’s remained stubborn is because there’s a weird tax credit. And you can look this up. It’s generally defined as cost segregation for high end investment homes. That’s really keeping investment homes and homes in general at very high prices. The other couple reasons are the stock market is certainly being good.

So people are usually happier and usually spend more money when they’re 401(k)s are going up, even though that’s not readily available money, but they generally are happier to spend money. And then finally, not a lot of people know this, but when the Biden administration passed the infrastructure bill, a big chunk of the infrastructure bill was spent in an election year. So, that’s causing money to circulate in our economy. 

So those are a lot of the reasons why inflation is stubborn. That’s a lot of the reason why it’s not going down, but it is slowing down. So what do we do now? This is our future part. So, I would suggest there’s three different types of people to consider. First of all, if you’re on a fixed income or very, very low income, please don’t pretend that this is temporary.

This is, the race has already started and groceries are way ahead of your income, and that’s not changing anytime soon. So, you’ve got to stop pretending, with your credit card. You’ve got to stop pretending by using your savings account and seeing that going down. You’ll need to get another job if you can. You’ll have to do the Dave Ramsey’s financial Peace University.

A lot of kids today are cohabitation. What I mean by that is they’re buying houses together. That’s happening a lot right now. It’s a huge trend. Some people, specifically those that are over 65, in Texas a section of the tax code where they can defer their property taxes. They come due the day of death. 180 days after the day of death.

I think that’s tax code  I want to say 30.06, but that’s a gun. 33.06, I believe. So there’s some tools out there. You just have to start getting on it. Stop waiting. Stop pretending this is not going away. And second, if you are kind of, in this state where you don’t have this fixed income, you’ve got some little wiggle room, again, you’re going to  have to change some habits.

You might have to say no to the kids. You have to start paying attention to the price of lettuce. You can’t just throw it in the cart anymore. You’ve got to start adding things up. And I would just say the main thing for that group of people, start paying attention. Otherwise you are going to see that credit card creeping up and you’re going to freak out when the interest rate is higher than you expected. And you’re going to wonder why your savings rate has gone down.

The reality is you need to start paying attention. And I did a podcast on Monarch Money as a tool to help you pay attention a little bit more, so you can check out that podcast.

Finally, if you’re a retiree, it is a challenge if you’re a retiree in which 100% or large majority of your income is a pension. And frankly, a pension that doesn’t go up that much. That’s a sticky situation. That would be the first category. But a lot of the clients we work with, they’re diversified. They might have an annuity and a pension, which is good in a lot of ways because it protects against longevity risk.

But then they also, many of our clients are over 65. They have stocks and bonds. Stocks in general do pretty well. It’s not undisputable, in terms of the growth trajectory of stocks in an inflationary environment. And it’s really hard to tell because you have to go back to the 70s and we’re just in a totally different economy, which was very much a manufacturing based economy in the 70s versus today is service based.

When inflation happens the question I think we have today is how quickly can a business pass along those rising input costs to the consumer? And so that’s the big question when it comes to stocks, because if you own stocks, you own a piece of a company. And if, let’s say Starbucks since we talked about them, if the price of cocoa goes up, the input cost, the cocoa bean goes up, then Starbucks, they have a margin they just apply to cocoa bean. I’m simplifying this. 

So if they want a 25%, profit, they just apply it to whatever that input cost is and they pass along the rising cost to the consumer, but they end up with the same profit. You follow me. So if you’re a stockholder, you generally don’t feel inflation that much because it’s passed on to the consumer.

There is a temporary shock because the consumer can absorb it. But that takes, you know, that’s a temporary thing. Usually businesses over time can navigate through that. Frankly, there’s smart business people that will navigate through this. So, I say all that because if you’re a stock owner, if you own stocks in a portfolio of mutual funds, exchange traded funds, or outright with these stocks, generally you’re going to navigate this just fine.

But you will see if you look at any research, there are pockets of stocks that do better than others. But again I don’t find anything conclusive to really, you know, say emphatically that, “Hey, REIT stocks or technology stocks are going to do better.” I just think that you can look at that historical data and draw some conclusions, but you just generally know that if you own a stock, you own a company that is not going to sit idle and let its margins erode.

They’re going to pass that along to the consumer, which will ultimately benefit you as a stock owner. So that was a lot to say. I hope you captured it all. But the bottom line is, I think you’re going to be just fine owning stocks, working with your advisor, maybe making tweaks along the way. But if you have a pension and that’s all you have, then yeah, you go, you go to the first group and say, hey, we’ve got to hustle and find ways around this. 

So there you go. That’s the past, the present, and the future when it comes to inflation. We are all believers now. We are all. So my baby boomer friends from the Jimmy Carter era, we believe you. We know it’s legit. It’s here. We feel it. 

If you’re a millennial, you’re a believer. I’m a believer. We’re all believers. so we just have to be thoughtful, strategic with our personal planning and strategic with our investment portfolio. When I use the word strategic, I just mean, don’t just, close your eyes. You have to start, and not overly messing with it. Think through it. Have conversations with advisors. Make modifications necessary. So that way you can be rewarded not only after tax but after inflation.

So, here we are in this next chapter of economy, and I’m glad that we can walk alongside of you at PAX. It’s an honor. And I want to remind you as always, you think different when you think long term. Have a great day.


Texas Tax Code Section 33.06 – Deferred Collection of Taxes on Residence Homestead of Elderly or Disabled Person or Disabled Veteran (public.law) 

Stocks: The Best Inflation Hedge | Kiplinger 

Grocery price inflation: Why are Americans paying so much for food? – The Washington Post 

Here’s Why Grocery Store Prices Are So High Right Now | TIME 

How Do Stocks Perform During Periods of Inflation? | The Motley Fool 

How Does Inflation Affect Stock Markets? (cadre.com) 

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