November 13, 2023

Inflation is something that most people have some level of familiarity with but has gotten extra attention in the last couple of years while it has been high. I am often asked about inflation, if it’s bad and how much it should be so I wanted to share a few thoughts on the topic.

Inflation is simply the rising of prices over time. A loaf of bread that might have cost 5 cents many years ago now costs $2.50. The price didn’t increase that much overnight but instead took many years to reach its price point today. The odds are strong that in the future, that same loaf of bread will cost even more due to inflation. In general, low and steady inflation is a sign of a normal, healthy, growing economy. The Central bank of the United States, The Federal Reserve is tasked with trying to ensure that inflation remains low and steady. Their stated goal is for inflation to average about 2% a year. Since prices typically rise over time when an economy is growing it is not reasonable to expect zero inflation, therefore low and steady is the target. Low inflation keeps prices more stable and steady inflation makes prices more predictable for consumers and businesses.

What is not normal, healthy or good for an economy is abrupt, high inflation as we witnessed following the pandemic. There are several upstream effects from inflation that also cause the value of financial assets to go down when inflation is high and there are several causes of what we have seen. The factors that drove the recent high inflationary environment would be a long topic all on its own, so for today it is important to simply know that high and unexpected inflation typically hurts the value of financial assets. Some assets have shown to be more resistant to inflation over time and others have been hurt quite a bit.

In summary, low and steady inflation is healthy in a growing economy. High inflation with big fluctuations hurts consumers, hurts businesses and is a drag on the values of financial assets.