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Breaking it Down: The talk on inflation can be a bit confusing. Different opinions abound; naturally, we all desire to know what is coming next. That isn’t possible, but we can break down the inflation discussion into some key points to aid our understanding. Consider these:

  • First, the not-so-great news: once the inflation genie is out of the proverbial bottle, it can take longer to return to normal levels than most people realize. History speaks to this reality. In 1979, Federal Reserve Chair Paul Volker took office and pushed the fed fund rates to an unprecedented 20%, 5% above the previous peak inflation rate. It took two more years for this extreme policy intervention to cut inflation to half its peak level and over six years to bring inflation to 2%.
  • An inflation jump to 4% is often temporary, but when inflation crosses 8%, it proceeds to higher levels over 70% of the time.
  • History also shows us that if inflation is cresting, inflation levels of 4 or 6% revert by half in about a year. If inflation is accelerating, 6% inflation reverts to 3% in a median of about seven years, threatening an extended period of high inflation (see chart).
  • We might dare to say that the Fed mistakenly declared inflation transitory when it was rising rapidly and when history tells us that, even at a relatively modest 4% rate, it often is not transitory.
  • All this said, core CPI is largely driven by housing/shelter costs as measured by the rather mysterious OER data. “Owner equivalent rent” is, by nature, a lagging read on what it costs for homeowners and renters to acquire housing. The raw data on housing, particularly housing prices, may prove to drop much quicker than OER shows us in the CPI print month to month. This is one of the ways we think CPI could surprise us to the downside over the next 90 days.

Where we go from Here: On Tuesday, The Wall Street Journal reported that the world population crested at 8 billion people. The U.N. credits the increased numbers to living longer and surging fertility rates in some countries. The milestone came a year later than anticipated because of the Covid-19 pandemic. According to the U.N, there were about 300 million people on Earth two millennia ago. The population fluctuated in the centuries to follow, mainly due to plagues and natural disasters. Then it accelerated, reaching one billion in 1804, four billion in 1974, and seven billion in 2011.

A natural part of population growth is addressing how to care for everyone, particularly the aging. Each nation handles this situation differently. In Finland, the basis of care is intergenerational relationships; the U.K. encourages increasing retirement savings, as well as moving the older working force into mentorship-type jobs. The solutions can be creative. In the U.S., our primary approach is planning ahead for retirement. While previous generations relied on employer pensions (which are still standard in the public sector), private-sector employers have replaced defined benefit pensions with 401(k) plans. Although the national savings rate has risen in the last decade, it is still shy of the recommended target of 15%. Fundamentally, people aren’t saving enough for lengthier lifespans, and most wait too long to begin saving. It’s never too early to evaluate your rate of savings and planning for the future.

Thanksgiving: Abraham Lincoln shared the following proclamation on October 20, 1864: “It has pleased Almighty God to prolong our national life another year, defending us with His guardian care against unfriendly designs from abroad and vouchsafing to us in His mercy many and signal victories over the enemy, who is of our own household. It has also pleased our Heavenly Father to favor as well our citizens in their homes as our soldiers in their camps and our sailors on the rivers and seas with unusual health. … He has been pleased to animate and inspire our minds and hearts with fortitude, courage, and resolution sufficient for the great trial of civil war into which we have been brought by our adherence as a nation to the cause of freedom and humanity, and to afford to us reasonable hopes of an ultimate and happy deliverance from all our dangers and afflictions: Now, therefore, I, Abraham Lincoln, President of the United States, do hereby appoint and set apart the last Thursday in November next as a day which I desire to be observed by all my fellow-citizens, wherever they may then be, as a day of thanksgiving and praise to Almighty God, the beneficent Creator and Ruler of the Universe.”

Much of the same could be said today—our nation has been preserved for another year, we are defended against unfriendly foes, and we have met the past year with fortitude, courage, and resolution. There’s always something to be grateful for; we just have to keep paying attention.

Happy Thanksgiving.