Resetting the Inflation Debate and an Interesting Historical Comparison

Almost every headline surrounding the great inflation debate of 2021 seems to revolve around two words: persistent and transitory. However, the concept of inflation is extremely nuanced, and there are many complicated factors that drive inflation up or down. These factors are usually intertwined with one another to varying degrees, making the conversation more complex than just persistent and transitory. I suggest we throw out these black and white terms and reset the inflation conversation altogether.


Inflation in our economy is simultaneously representing two things:

  • The falling value of the U.S. dollar
  • The rising level of prices for goods and services

Take the following example. One year ago, you had $100, and you were able to buy $100 of goods and services. Today, we find out that inflation is at 6%. When you go out with that same $100, you find out that the exact same goods and services cost you $106. So, the same amount of money only buys you 94% of what it did last year.

High inflation like this will result in people needing at least one of the following:

  1. Bigger pay raises from their employers
  2. Better returns on their investments
  3. Lower their consumption of goods / services

When you are retired and not working, it can further limit you to either chasing higher investment returns (typically in the form of riskier investments) or lowering your standard of living, neither of which are ideal options.


  1. High Consumer Demand – When looking at data from the U.S. Bureau of Economic Analysis, we can see that consumer demand rebounded almost as quickly as it fell off when COVID hit in March 2020. In fact, consumer demand is slightly above where we would be if we just drew a straight line continuing the trend from 2019 to 2020.Personal Expenditure Information
  2. Supply Chain Issues – While consumer demand has caught up to where we were pre-pandemic, the supply chain was not as quick to rebound. We’ve all seen the viral stories about needing to buy Christmas gifts months in advance, or the pictures of cargo ships sitting in limbo outside of the Port of Los Angeles. Consumer demand is outpacing supply, which is placing upward pressure on prices.
  3. Higher Material Costs – From crude oil to rubber, raw material costs have continued to increase in 2021. The end customers are typically the ones that bear this burden. The ongoing labor shortage is also driving higher input prices. Employers are trying everything to get people back to work, from increased benefits to signing bonuses. The more it costs to produce a product, the more the customers will have to pay in the checkout line.
  4. Increased Money Supply – All the stimulus that has been poured into the economy helped the United States rebound rather quickly, economically speaking, from the pandemic. However, we are now feeling some of the consequences that come from trillions of dollars of stimulus. When more and more money is chasing fewer and fewer products, prices will naturally rise.

While these are certainly not the only factors affecting inflation, they are a few of the main drivers today. As we said earlier, it is easy to see that all these factors are intertwined with one another.


There are not many historical time periods we can compare to what we have been going through since the beginning of 2020. However, there is one interesting period to examine: World War II.

During WWII, production of durable goods (appliances, furniture, or other goods that tend to last between 3-10 years) was shut down as factories across the country were repurposed to support the wartime effort. As a result, the personal savings rate during the latter years of World War II spiked to almost 30%. For comparison, the savings rate was less than 10% in the years prior. As the country emerged from the war, American citizens had more money saved than ever before, along with high demand for goods that were previously unavailable. It also took some time for the supply of these goods to return to normal levels as factories had to revert to pre-war conditions. The result of all of this was high inflation and a spike in the cost of goods across the nation. However, this spike proved to be temporary as inflation returned to normal levels once the supply chain stabilized and demand leveled off.

Sound familiar? As COVID spread across the globe in early 2020, we collectively shut down as a country. With little to do or spend money on, the personal savings rate in our country spiked once again, surpassing the same 30% mark in 2020. As 2021 progressed, we saw a similar situation: above average household savings, pent-up consumer demand, and a supply chain that was slow to return to pre-COVID levels. Except in this case, it wasn’t only durable goods that were constrained. Americans were also severely limited in activities like eating out and traveling. You can never draw exact parallels, but these similarities do support the argument that the inflation we are seeing today may not be as concerning as some are making it out to be.


The latest inflation numbers released in November 2021 were 6.7%. This is well above the target of 2% discussed frequently by Jeremy Powell, chair of the Federal Reserve. Given the factors discussed here, I do not see inflation going down significantly anytime in the next 6-9 months.

One of the problems with inflation is that it can easily become a self-fulfilling prophecy. For example, when workers expect to pay higher prices, they demand higher wages, potentially forcing companies to increase prices to protect profits. Examples like this exist all over the economic spectrum. It is part of the reason it can be so hard to escape the cycle of high inflation once it begins.

The last quarter of 2022 may be the first time we can expect to see inflation levels come back closer to the Fed’s 2% target. But even this will partially depend on how aggressive the Federal Reserve follows through on tapering the money supply and raising interest rates.

The next logical question is:

                       “If Inflation remains high, what should I do with my money?”

And the answer to this is just as complicated. Some argue that the growth of stocks will be the only haven from inflation. Others say that money will pour out of stocks as fixed income becomes more attractive with rising interest rates.

Traditionally, commodities like gold and silver have done exceptionally well in inflationary environments, yet gold has fallen 5.66% year-to-date while silver is down 11% over the same period. Meanwhile, the U.S. Dollar has flexed its own muscles and gained 7.76% for the year. Furthermore, last month $83 billion flowed into equities, $20.6 billion flowed into fixed income, while $1.3 billion flowed out of commodities (source: Pensions & Investments). Perhaps the markets are telling us that equities (or riskier assets like cryptocurrencies) are the place to be investing in today’s inflationary environment. Alternatively, perhaps more and more risk is being taken as investors chase outsized returns. When it looks too easy to be true, it usually is.

In the end, a version of the same answer prevails. Every day we must evaluate the risk / reward proposition that the market presents to us and act accordingly. What is written here could easily be thrown out the window tomorrow, much less six months from now. By viewing the markets from this perspective, it helps us make calculated decisions today. More importantly, it helps us re-evaluate those same decisions in the future based on the ever-changing market & economic conditions.


Written By:

Justin Rush

Justin Rush, Financial Advisor


Partner Commentary


“As the article points out, if the rate of inflation exceeds your rate of return on your assets, then you actually have a negative rate of return. Therefore, your assets shrink faster than they otherwise would under the yoke of higher prices! To make matters worse, you must calculate the taxes that you have to pay on your investments to determine your “real” rate of return; that is, how much are your assets actually earning net of taxes and inflation? For example, if you make a 7% rate of return on your portfolio, and you are in the 30% tax bracket, you actually earned 4.90%. After you subtract the current inflation rate of 6.70%, your “real” rate of return is a negative (1.80%). Your assets shrink faster than they should because it costs more money to buy goods and services when your “real” returns are negative. Consequently, it’s important to have part of your portfolio allocated towards stocks since they tend to grow long-term at 10%+, which is the perfect hedge against inflation and taxes!” – Charlie Nemes



“Inflation is a tax on all consumers and investors. It immediately and without warning reduces the purchasing power of every dollar in your accounts. As advisors, we will continue doing our absolute best to not only mitigate inflation but achieve real returns above and beyond it!” – Chris Nemes



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