What Might Be Next — Inflation or Deflation?

What Might Be Next — Inflation or Deflation?

Consumer prices fell by 0.8% on a seasonally adjusted basis in April, the biggest drop in more than a dozen years, the Bureau of Labor Statistics reported. Conversely, prices for grocery items jumped 2.6%, the highest one-month increase in 46 years, with eggs rising by 16%.1

What’s going on here? Well, the devil is in the details, an important lesson to learn about interpreting data. It’s true that supermarket prices are rising, mainly because of two factors: The coronavirus pandemic has disrupted supply lines, and more Americans are eating at home and buying more groceries. Together, these factors have contributed to the tight food supply, and per the economic theory of supply and demand, when supply is low and demand is high, prices rise.2

As for the drop in consumer prices, that’s the other side of the coin. With the nationwide efforts to close businesses and shelter in place, people are simply buying less. They may be out of a job or worrying about that prospect, so they’ve been hanging onto every last dollar — buying only the necessities.

The thing about falling demand is that it requires retailers and manufacturers to drop prices to entice sales. If they can’t sell what they are producing, then they cut back production, and people lose jobs. It’s a vicious circle, and one that can lead to deflation.3

Let’s face it, both inflation and deflation can have negative effects on investment portfolios, so it’s important to take steps to help protect against those risks.4 We have strategies that can help mitigate the effects of volatility on your retirement plan. Give us a call, and we’ll help tailor a plan for your personal circumstances.

Inflation usually gets top billing when discussing the economy because rising prices over the long term cut down on how much a dollar can buy. However, a little inflation, around 2% to 3%, isn’t a bad thing. It’s usually an indicator that people have jobs, spending demand is high and companies can afford to raise prices. Deflation, in contrast, can be more concerning, as it can lead to an economic recession or depression.5

The Federal Reserve, as part of its efforts to shore up the economy during the pandemic, appears just as intent on mitigating deflation as it is inflation. In early May, Fed Chair Jerome Powell said, “As long as inflation expectations remain anchored, then we shouldn’t see deflation. Needless to say, we’ll be keeping very close track of that.”6

Content prepared by Kara Stefan Communications.

1 Anneken Tappe. CNN Business. May 12, 2020. “Prices are tumbling at an alarming rate.” https://www.cnn.com/2020/05/12/economy/consumer-prices-april/index.html. Accessed May 21, 2020.

2 David Goldman. CNN Business. May 14, 2020. “Grocery prices are soaring. Here’s what’s getting more expensive.” https://www.cnn.com/2020/05/13/business/grocery-prices/index.html#:~:text=That%20was%20the%20biggest%20increase,demand%20for%20groceries%20shot%20up%20. Accessed June 5, 2020.

3 Anneken Tappe. CNN Business. May 12, 2020. “Prices are tumbling at an alarming rate.” https://www.cnn.com/2020/05/12/economy/consumer-prices-april/index.html. Accessed May 21, 2020.

4 Paulina Likos. U.S. News & World Report. May 14, 2020. “How Inflation and Deflation Impact Your Investments.” https://money.usnews.com/investing/investing-101/articles/how-inflation-and-deflation-impact-your-investments. Accessed May 21, 2020.

5 Troy Segal. Investopedia. March 25, 2020. “Inflation vs. Deflation: What’s the Difference?” https://www.investopedia.com/ask/answers/111414/what-difference-between-inflation-and-deflation.asp. Accessed May 21, 2020.

6 Paul Davidson. USA Today. May 3, 2020. “Besides millions of layoffs and plunging GDP, here’s another worry for economy: Falling prices.” https://www.usatoday.com/story/money/2020/05/03/coronavirus-us-deflation-falling-prices-new-economic-risk/3070084001/. Accessed June 5, 2020.

Communications such as this are not impartial and are provided in connection with advertising and marketing of the financial services offered by Guardian Capital Management, LLC. Guardian Capital Management, LLC is not an attorney or a tax professional and the information contained herein should not be considered tax or accounting advice, legal or regulatory advice. 

The information provided herein is educational in nature and not designed to be a recommendation for any specific investment product, strategy, plan feature or other purposes. Accordingly, it should not be construed by any consumer and/or prospective client as solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation. Prior to making any investment or financial decisions, an investor should seek individualized advice from a personal financial, legal, tax and other professional advisors that take into account all of the particular facts and circumstances of an investor’s own situation.

Guardian Capital Management, LLC offers investment advice through Belpointe Asset Management, LLC, 125 Greenwich Avenue, Greenwich, CT 06830 (“Belpointe”). Belpointe is an investment adviser registered with the Securities and Exchange Commission (“SEC”). Registration with the SEC should not be construed to imply that the SEC has approved or endorsed qualifications or the services Belpointe offers, or that or its personnel possess a particular level of skill, expertise or training. Insurance products are offered through Guardian Resources. Important information and disclosures related to Belpointe are available at http://www.belpointe.com. Additional information pertaining to Guardian Capital Management, LLC and/or Belpointe’s registration status, its business operations, services and fees and its current written disclosure statement is available on the SEC’s Investment Adviser public website at https://www.adviserinfo.sec.gov/.   

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