Inflation: How We Got Here and One Low-Risk Play By, D.R. Barton, Jr.

My guess is that many people reading today’s article haven’t before experienced inflation in the way that it’s showing up now—as higher prices for regular stuff you buy. And if the stuff you buy is a home or a car, those prices are not higher, they are a whole lot higher. Same for gasoline or lots of food products.

Houses in my neighborhood are up 30% or more year-over-year. Used car prices have zoomed up almost 40% in 2021 (though the rate of increase slowed a bit in March 2022 when the most recent numbers were released). And my beloved ribeye steak is now 50% higher in the local store for regular cuts and almost 80% higher for prime. So, this is getting personal…

The reason I say that many people haven’t been exposed to these levels of inflation is that we haven’t seen these levels of inflation here in the U.S. in almost 40 years. Here’s a chart showing the Consumer Price Index dating back 50 years:

We can see that the current “All Items” inflation rate in the U.S. for March of 2022 was 8.5%—a number we haven’t seen since the early 1980s. In fact, the adjusted (food and energy removed) number hasn’t been above 2.5% for more than a month or two since the early 1990s!

Inflation – Where the Rubber Meets the Road.

Where this higher inflation is really having a major impact is for those with fixed and/or lower incomes. And I was reminded last night of how this truly rapid rise is impacting so many people. I was honored and blessed to be able to spend almost 90 minutes giving an online presentation about the state of the markets to the donor base for a local charity called Good Neighbors. Their vision is “for all people in our communities to live in a warm, safe, dry, and healthy home.” They provide home repair, free of charge, to those in need in two local counties: the one I live in here in Delaware, and a county just across the state line in Pennsylvania. With a small income/donation budget and a very big volunteer base, they serve hundreds of homeowners a year. Check out their website: https://www.goodneighborshomerepair.org.

I mention this hard-working and impactful group because, as I was preparing for the presentation, I found some charts that make two things very clear:

  1. Why organizations like this are needed more than ever
  2. The main reason why we have the inflation that we have today

Let’s look at those charts…

The first shows household net worth, which has grown 2.92x on an inflation-adjusted basis from late 1987 until early 2020:

You can see how it then exploded from 2020 until 2022 (the reason which will become evident in the last chart below).

The huge discrepancy is how little household income grew over the same period:

This data comes from the U.S. Census Bureau (and that’s one of the reasons it hasn’t been updated for 2021 yet). But the contrast between the small growth in median annual income and net worth is striking, even when we don’t look at post-covid numbers, where there is an even greater chasm.

Next, I’ll give you a reason for the climb in the net worth numbers plus an explanation for that big leap up in those in the last two years. And more importantly, they will show, unequivocally, a huge reason why inflation has exploded…

Here is the U.S. Federal Reserve “balance sheet” since 2002 (which is all the data available):

In short, the Fed’s balance sheet has ballooned out of control. It is up a massive 2.4x since September 2019. Many would argue it was already out of control before then.

A question that quickly comes to mind is this: Why didn’t the previous infusions of central bank capital trigger a similar leap in inflation?

This infusion of Fed money dwarfs those that came before. And that massive liquidity is flowing through markets at the very same time that the economy rebounded much quicker than expected, especially consumer spending and employment levels. Throw in some ongoing supply chain disruptions and a large-scale war that is disrupting agricultural and energy supplies, and we have an inflation-escalating storm.

With all of that happening, we have stock markets, crypto, and bonds all heading down over the past months. So, I’d like to share one investment that is extremely low risk with an appealingly high return (at least for the short to intermediate-term): U.S. Treasury Series I Bonds, or I Bonds. And the good news is that they are inflation-adjusted. I Bonds issued beginning in May of 2022 will offer an interest rate of a whopping 9.6%. Part of that rate is tied to the Consumer Price Index and will re-adjust every six months, but that is a tantalizing near-term return.

They are bought only on the U.S. government bond sales website. Here’s the link directly to the I Bonds page: https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm

A few quick pros and cons:

  • Since they are a purchase directly from the U.S. government, there are no fees or brokerage commissions.
  • Any I Bonds purchased before May have an annual yield of 7.12%
  • The minimum purchase is 25 dollars and then electronic purchases can be made in $0.01 increments up to the annual maximum.
  • That annual maximum purchase is $10,000 per social security number (unless you are getting a U.S. federal tax refund, which you can use to buy an additional $5,000 in “paper” I Bonds).
  • You must hold the I Bonds for a minimum of 12 months.
  • If you sell them before a five-year hold period, you forfeit three months of interest.
  • Be sure to check out who can own the I Bonds. In general, individuals must be U.S. citizens or residents, though corporations, trusts, partnerships, etc. can also own them.
  • This is only intended as a quick overview. The complete info is on www.treasurydirect.gov.

For a place to park some cash that is safe, and offers a high yield, this is tough to beat right now. Let me know if you have some other favorites at the email address below.

As always, I love to hear your feedback! Please email your thoughts to me at drbarton “at” vantharp.com.

Great trading and God bless you,

D. R.

Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments
Scroll to Top