Broker Check

Sticky Inflation

January 31, 2023

My column 1/28/23 in the New Haven Register: Higher Prices are here to stay

"Sticky" inflation increased 5.6% year over year in December, according to the Atlanta Fed. "Sticky" inflation numbers look at the costs of items that slowly change once they increase, such as services, rent, and wages. The complete list includes auto repair costs, car insurance, medical care, public transportation, and communication. The list also incorporates recreation, alcohol, and dining out. Stubborn pricing in these critical areas suggests the Fed still has work to do. 

Sticky inflation aside, it's reasonable to consider that higher prices are here to stay. U.S. officials and companies have realized that aligning supply chains with countries that are not U.S.-friendly was a mistake. Covid and sword rattling have unmasked these alliances for what they are. In the early decades of offshoring our manufacturing, we all enjoyed lower costs at Walmart. Recent supply chain disruptions and deteriorating U.S. and China relationships have led to a wake-up call. Not to mention that 50 years of offshoring have impacted our middle class. Onshoring or “friend shoring” are now becoming popular buzzwords on quarterly investor calls. That said, some supply chain experts suggest it may take up to a decade to rearrange some of our global supply chains. Retooling our manufacturing processes and changing international dance partners will likely lead to elevated costs. Christian Ulbrich, CEO of JLL, a global real estate, and investment firm, was recently quoted as saying that “it was the standard view among his peers that 4% inflation is the new 2% inflation”. He also cites the “decoupling of the U.S. and Chinese economies and the move towards green energy as culprits in keeping inflation persistently around 5%”. Throw in the Russian-Ukraine war, and you have a recipe for higher prices, headwinds, and lots of recession talk in the news.

Suppose sticky inflation holds at these levels. In this scenario, the accelerated spending down of personal savings will continue, which can lead to a slowing economy as higher costs tend to foreshadow lower corporate profits. As a retiree, if inflation remained at the 5% level, the value of your assets would be cut in half every 14 years, which would challenge most seniors trying to keep up with the costs of living over a multi-decade-long retirement.

As an investor, consider that dividend and value stocks tend to hold up better than growth stocks during persistent periods of inflation. This is especially true if the dividend payout can keep up with inflation and the company can increase dividends in the future. Certain types of real estate, hard assets, and inflation-friendly alternative investments are other areas to research if inflation persists.

Eric Tashlein is a Certified Financial Planner Professional™ and financial advisor with Cambridge Investment Research Advisors, Inc. He can be reached at 800-878-7152 or through Offices: OES Wealth Partners, 71 Bradley Road Suite 4-A, Madison, CT 06443 & 30 Old King Hwy S, Darien, CT 06820. The information provided is for educational purposes only and doesn't intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance." Cambridge Investment Research Advisors, Inc and OES Wealth Partners are not affiliated."