At the recent Berkshire Hathaway shareholders meeting, Warren Buffett said he sees, “very substantial inflation and rising prices.”
His company owns one of the major home builders, Clayton Homes. Among some of his other companies are Benjamin Moore paints and Shaw carpeting.
“We are raising prices, people are raising prices on us and it is being accepted,” Buffett said.
This should come as no surprise to anyone doing home repairs or remodeling. Lumber has doubled in price over the last year. I recently bought 25 feet of electrical wire and it was over $58. This inflation is making its way to home prices where you often must offer more than the listed price to buy a house. People are also seeing big increases at the grocery store and meal costs at restaurants are increasing.
Inflation is the loss of purchasing power when you shop. Governments like to see about 2% annual increases. At that rate, the economy can usually grow and most people can find jobs. It is the stated plan of the Fed to keep inflation in that range. When it exceeds the rate, the Fed starts to raise interest rates to slow the economy. This makes it more costly for consumers and companies to borrow.
Another thing that triggers inflation is too much deficit spending. This is currently happening because of all the stimulus spending. On top of all of this comes a proposed “infrastructure” spending plan of another $4 trillion.
Something has to give when Congress turns on a fire hydrant of fiscal spending and the Fed has already opened the flood gates with zero-interest monetary policy. The results have to be much higher inflation.
While government figures do not reflect this yet, it often takes time to show up. Everywhere you look, there are help wanted signs. Many are offering higher pay than before because it is so hard to get workers. At this time, the Fed says they may be willing to accept a little more inflation to achieve full employment. Is this not already happening when you have national companies advertising that they need 50,000 new employees?
Higher employee cost result in even higher product cost and even more inflation.
We have been in a low interest rate environment for more than 20 years. That is one reason we have seen the stock market explode. Investors are earning so little on bonds and bank products that they are taking more risk than many would like. Once interest rates go up, the market is likely to start to become more volatile and go down. This is probably the thing most likely to trigger a bear market. Remember, when interest rate rise, bond values go down. That is simple math and bonds are supposed to be the safe element in your portfolio.
It is just a matter of time before the Fed must raise interest rates. The economic results of this are pretty easy to predict.
The biggest problem many investors will have is to overcome the human nature of greed and their short memory that markets do not always go just up. Greed is a natural human tendency, and things like the blip correction last March and quick recovery in April reinforce what could be false hope. If you are young and can tolerate risk, the stock market could be a great place. If you are retired or close to it, caveat emptor, which is Latin for buyer beware. If not, you might follow the market to the bottom.
Gary Boatman is a Monessen-based certified financial planner and the author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”