Vaccination, Inflation, & Vacation

Wednesday, we learned that the cost of living skyrocketed in April. Yikes. What are we to make of this? First, let's think about how we got here.

My kids got vaccinated yesterday. For my family, that means we can start to envision a life that looks a lot more like "before." As COVID-19 cases go down in the United States and vaccination rates go up, more of us are making plans. Those plans involve spending money. And consumers appear to be willing to pay extra to make up for the leisure and adventure they missed out on last summer.

Many Americans are feeling flush with cash. They haven't spent very much money in the last year. Government stimulus has put money in pockets. The Federal Reserve has kept rates low. Homeowners have locked in 30-year mortgage rates at or below 3%--and many have done cash-out refinancing to take advantage of real estate appreciation. The stock market (until this week) was hitting all-time highs every day. This is all giving Americans the confidence to spend. What effect is that having?

Lumber is an extreme case. But a year ago, with people stuck at home, they started to plan renovation projects or buying a new house altogether. Mortgages and home equity loans are cheap. Let's add a gym! And a Zoom room! Suppliers were slow to believe the demand was real. Sawmills had a hard time staffing (in some cases because the pay couldn't compete with the state and federal COVID-19 assistance checks). When that much demand meets a finite supply, prices go up. Dramatically. As in more than 400%.

This is happening across the economy— and moving to areas like rental cars and plane tickets as tourism makes a comeback. People are spending money again, but not all of what they want is readily available. Supply chains were disrupted by the pandemic (toilet paper!) and held up further still because of the recent Suez Canal blockage--and now the cyberattack on the Colonial Pipeline. As a result, we may be willing to spend a little more to ensure we get what we want before it's gone.

Therefore we have inflation. On the one hand, I'm relieved. The Federal Reserve has been slowly backing up against zero on the way to negative interest rates in an effort to prop up the economy since long before COVID-19. Evidence of a recovering and growing economy (of which modest inflation is a symptom), in theory, allows the Fed to bring rates back up to something more historically normal. But inflation brings up some uncertainty as well.

Are price increases a short-term byproduct of post-pandemic life? Can the Fed stay on top or ahead of runaway inflation? What might inflation do to stock and bond prices? Would future rate increases jeopardize economic growth? How significantly will inflation erode Americans' purchasing power?

These are the questions that will keep economists and prognosticators busy for sure. Here's a better question for us: What is one of the best long-term defenses against inflation? A high-quality investment portfolio is put in the context of a customized financial plan. We don't do this to be flashy or to brag about investment returns. We want to ensure that your future purchasing power is protected. Otherwise, we would be content to invest in a basket of CDs, money markets, and Mason jars. The short-term volatility and paper losses (ugly statements) are the risks we are willing to take in exchange for long-term success.

That being said, volatility can be uncomfortable. Paper losses can create anxiety. That's why we have an Investment Policy Statement--to remind us why we do this and how we plan to go about it. Because life changes all the time, it's good to review things periodically. Is it time to have a conversation about your situation? That's what I'm here for.

I hope you have some fun summer plans. My family does. Summer is also a great time to review things. Curious about your retirement trajectory? Cash flow? Tax planning? Debt structures? Insurance? Let's find some time to catch up. I'd welcome the opportunity to discuss vaccination, inflation, and vacation. Also, let me know what you think of this collection of thoughts. Should I do more of this? Less of it? Does it convey helpful information?

I’m grateful for your support. Have a great weekend.