Inflation is Like Kale
Last month investors feared the Fed would raise rates to counter inflation. This month, the Fed told us they do not fear inflation because the latest figures reflect a temporary spike. So now, investors fear the Fed is wrong.
Everyone is right. The recent extreme spikes in CPI and gas prices are temporary – but inflation is already here. Never mind the economic figures – rising prices are evident in everyday life. There is less variety on the shelves and what is left is more expensive.
And it is good for us.
Inflation is like Kale – you are sure you will hate it, but you eat it anyway because everyone is serving it. Then you realize it tastes great with the right sauce, or baked with salt. It is good for you, and a moderate helping hits the spot. After 40 years of declining rates, it is time to “serve it up”. The economy can handle some inflation and the Fed can taper in moderation without hurting growth.
Rising prices indicate that consumers are spending, goods are moving, and the economy is growing. Yes, with inflation, we get less bang for our buck – and we do not like that. But not liking it does not make it inherently bad. We do not need ten aisles of different brands of the same item – it is wasteful. There is an abundant means to satisfy our desire for variety through recycling and upcycling. We do not need to fly across the globe every year to “find ourselves”. We are right here. And growing companies do not need to borrow more than they can deliver in the foreseeable future.
Rising prices are a healthy phenomenon and not to be confused with the runaway inflation resulting from toxic, unsustainable policies. Bankruptcies and defaults cause deep pain. But the cash and the unemployed will be reabsorbed into what is becoming a less wasteful, more efficient global economy. Instead of fearing Central Bank policies to stem inflation, it would make more sense to support policies that provide the vulnerable with cash, healthcare and vocational training in the transition period, so they can re-join the workforce with fulfilling jobs and help fuel growth.
Avoid getting stuck in the details. Adopt a Core/Satellite approach where a broad perspective keeps both fear and exuberance at bay. From this “helicopter view” the investor can recognize the rare indication that it is time to re-balance the core by shaking out allocations to overly borrowed growth companies and long-term bonds. And pullbacks like this past week are understood as an opportunity to trade the periphery and enhance yield.
So you can have your kale and eat it, too.