Is Inflation Here to Stay? - Adviser Investments

Is Inflation Here to Stay?

October 15, 2021

Benjamin Franklin famously quipped, “Guests, like fish, begin to smell after three days.” For pundits and policymakers, the whiff of higher inflation, which appeared to be on the way out over the summer, raised a stink this week and threatened to linger longer.

The consumer price index, which measures what consumers pay for goods and services, rose 5.4% in September from the same time last year, ticking up from 5.3% in August.

Still, the S&P 500 tallied its best day since March on Thursday—a 1.7% gain—after a strong start to third-quarter earnings season overshadowed inflation concerns. All 11 sectors of the S&P rose, leaving the broad index just 2.2% off its Sept. 2 all-time high after weeks of choppy trading.

Market Returns

Does this signal smooth sailing for stocks? Not necessarily. But with bond yields low and inflation in the air, stocks remain an attractive choice for traders.

What’s causing this stubbornly high inflation (relative to recent decades) and how long will it last? Read on.

Supply Chain Snarls Slow Recovery

Logjams in the global supply chain continue to hamper economic recovery. It’s Econ 101: Demand is there, supply is not, so we’re waiting longer and paying more for goods.

Chalk it up in part to the delta variant: Even as the U.S. and Western Europe emerge from pandemic lockdowns, critical goods facilities across Asia—producers of coffee, palm oil, tin, semiconductors and more—remain beleaguered by shutdowns.

You know it’s serious when even the mighty Apple, which has the muscle to bend the supply chain to its will, can’t secure what it needs. This week, the tech titan slashed production estimates for the iPhone 13 by 10 million units for 2021, citing the chip shortage that has impacted everything from cars to consumer electronics.

And once goods are finally packed and shipped, coming ashore is the next big hurdle. This week, President Biden intervened in the bottleneck that has clogged the vital Los Angeles and Long Beach ports, implementing a “90-day sprint” to keep ports open around the clock to clear the congestion and get goods out.

The Vicious Cycle of Higher Prices

Three percent of the U.S. workforce—4.3 million employees—left their jobs in August, the highest rate of monthly attrition reported by the Labor Department in records dating back to 2001. What’s going on? Some people simply aren’t ready to return to work, while others are choosing now to pursue a new career path.

Regardless of why this labor shift is occurring, the effect feeds into a vicious cycle.

Unlike the aftermath of some previous recessions, when consumers tightened their purse strings and businesses scaled back on headcount, the pandemic recovery has been strengthened by household spending and companies competing for workers. This creates a cycle of companies jacking up prices (in part to pay higher wages in a tight labor market) and workers asking for more money and job-hopping (partly to pay for goods and services that cost more). Repeat.

Housing prices continue to rise, something we’ve been closely monitoring as a factor that could make inflation stickier. Owners’ equivalent rent, a gauge of what homeowners estimate they could charge in rent (and a 25% component of the “headline” CPI inflation rate), rose by 0.4% last month, the most in 15 years. Actual rents rose 0.5% and may finally start catching up with soaring home prices.

Factor in supply chain kinks and the spike in energy prices heading into the winter and things get even more complicated.

These overlapping trends make it appear plausible that inflation will be less fleeting than many believed. The question is: How long will it last?

How Long Is ‘Transitory’?

This week’s reader question: How long will elevated inflation last? Is transitory still the right way to think about it?

Portfolio Manager Charlie Toole had this to say:

To say that this is a hotly debated topic is an understatement.

Many analysts and investors view today’s inflation environment as “transitory”—but what that actually means is open to interpretation. Transitory includes a timing component by definition, but is that time frame three months, six months or a lot longer?

Wall Street analysts and some Federal Reserve governors are starting to change their tune on inflation, suggesting it could remain higher longer than previously anticipated. For instance, earlier this week Atlanta Fed Chair Raphael Bostic called transitory a “swear word” that he doesn’t like using to describe inflation. He went on to say, “I continue to believe currently elevated inflation is episodic, driven by pandemic conditions such as disruptions in supply chains and labor markets. A major caveat, though, is that the severe and pervasive supply chain issues will probably last longer than most of us initially expected.”

As noted above, September CPI rose 5.4% from the same time last year. The good news is that inflation estimates for late 2022 are close to 2%, and they haven’t budged over the last six weeks.

Transitory inflation
Sources: BLS, Bloomberg, Adviser Investments.

It’s likely that inflation will normalize late next year. Until then, expect the debate and wordplay to be “severe and pervasive”—anything but transitory.

Financial Planning Friday
The ABCs of Medicare

All of the talk of inflation this week came with one bright side for retirees: Social Security benefits, tied to inflation, will increase 5.9% next year—the biggest bump in 39 years. Where might that extra income be spent? Health care is one option.

We recently wrote about Medicare’s Annual Election Period, the two-month window beginning today (Oct. 15) when recipients can fine-tune their Medicare coverage. Since the program’s creation in the 1960s, Medicare has been expanded and amended several times, leaving participants facing a confusing hodgepodge of rules and terminology. This week, we’ll sort through the alphabet soup of Medicare coverage and spell out what you’ll need to know to get started.

Regardless of which coverage options you choose, you need to sign up on time. Your “initial enrollment window” starts roughly three months before your 65th birthday and extends for about three months after—failing to act during that period can lead to higher premiums. There is one exception: You can delay Medicare enrollment if you’re still working at age 65 and receive health care through your employer. In this case, we recommend enrolling a month before you retire to avoid gaps in coverage.

Let’s break down Medicare’s benefits by the letter:

  1. Medicare Parts A and B. Medicare Part A covers hospital care and Medicare Part B covers doctor visits. Everyone who signs up for Medicare receives these two basic types of coverage, sometimes referred to as “Original Medicare.” And we do mean basic: Many common health care expenses are not fully covered by Parts A and B. If you require frequent hospital stays or doctor visits, the deductibles can be confusing and expensive. As a result, many people choose to supplement or replace Parts A and B with additional insurance.
  2. Medicare Part C. More commonly known as Medicare Advantage, Medicare Part C consists of the private insurance plans that can be used as alternatives to Medicare Parts A and B. Most Medicare Advantage plans offer more comprehensive coverage than the originals and may include things like glasses and contact lenses, as well as dental care and prescriptions. Premiums for Medicare Advantage are generally more costly than for Parts A and B, and benefits and availability vary by geographic area.
  3. Medicare Part D. Medicare Part D is supplemental insurance that covers prescription costs.
  4. Medigap (Plans A through N). Like Medicare Advantage, Medigap plans help bridge the gaps in Medicare Parts A and B. Medigap plans are delineated by letters—ranging from Plan A to Plan N, with Plan G being the most comprehensive. In general, Medigap plans offer less coverage and are less expensive than Medicare Advantage plans. However, Medigap plans don’t include prescription coverage; if you opt for one, you’ll also need to get a separate Part D prescription plan.

How do you know which plans to choose? Check out Medicare.gov to see the Medicare Advantage plans available in your area. If you don’t find the coverage you want, explore a Medigap and Part D prescription plan.

For more guidance, please listen to our Medicare Made Simple podcast or check out our handy Medicare reference guide. And remember, you can always contact your wealth management team for advice specific to your situation. Your team’s financial planning professional would be happy to discuss these issues with you—after all, we are The Planner You Can Talk To.

Register for Our Q4 Webinar

We’ve opened registration for our upcoming Q4 webinar, Booster Shots, Market Shocks and the End of Fed Intervention, which will be broadcast live this Wednesday, Oct. 20, from 4:30 p.m. to 5:30 p.m. EDT.

The discussion will feature commentary from Chairman Dan Wiener and Director of Research Jeff DeMaso. Additional insights and answers to your questions will be provided by members of our investment team.

Click here to register and pose your questions for our team as we head into the final months of 2021.

And if you can’t make the live event, we’ve got you covered—you can register to be notified when the replay is posted to our website right here.

Adviser Investments in the Media

Chairman Dan Wiener spoke to RIABiz about Vanguard’s efforts to make its target date fund prices more affordable.

Chief Investment Officer Jim Lowell appeared on Fox Business, where he discussed inflation trends and supply chain concerns, and on CNBC to talk about earnings, inflation and whether there’s value to be found in China.

In this week’s Market Takeaways, Research Analyst Liz Laprade offered perspective on soaring energy prices, while Vice President Steve Johnson explained what earnings reports have to say about the consumer.

Senior Vice President and Fixed Income Manager Chris Keith weighed in with his Q4 bond outlook.

And remember, you can always visit the Adviser in the Media section of our website for the Adviser Investments team’s informative views on the market and the economy.

Looking Ahead

Next week will bring useful reads on housing (building permits, housing starts, existing home sales), the service and manufacturing sectors, leading economic indicators and the Federal Reserve’s “Beige Book” of anecdotal reports from across the country. Third-quarter earnings reports will continue to stream in, providing insights into where corporate America has been and, more importantly, where it’s headed.

As always, please visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.

If you have any questions or concerns, please don’t hesitate to email your wealth management team or call our toll-free number, (800) 492-6868.


Please note: This update was prepared on Friday, October 15, 2021, prior to the market’s close.

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