Watchful Waiting: Will the Inflationary Surge Persist? | Schwab - Millennium Trust Company

Watchful Waiting: Will the Inflationary Surge Persist?

January 6, 2022
By Millennium Trust

The impact of runaway inflation may have faded from the collective memory of some investors, and may never have been experienced by many others, but most realize at some level that price increases can present a risk for the markets and for retirement savers, in particular.

Warren Buffett offers one of the more graphic yet succinct descriptions on the nature of this risk, referring to inflation as a “tapeworm” that “preemptively consumes its requisite daily diet of investment dollars regardless of the health of the host organism.” With inflation’s recent and unwelcome acceleration, that “tapeworm effect” threatens to diminish not only the profits of corporations but also the spending power of retirement savers’ portfolios.

Sounding the alarm

The inflation alarm bells started ringing several months ago and continue to grow louder. The U.S. Bureau of Labor Statistics1 reported in early December that the Consumer Price Index rose 6.8% on a year-over-year basis in November 2021 accelerating at its fastest pace since 1982. Gasoline prices alone rose 58.1%, with food prices rising a budget-popping 6.1% compared to the prior year.

Pandemic-driven or longer-lasting?

Much of the increase is still presumed to be pandemic-driven. The worker shortage — a hangover from health concerns over Covid-19 — continues to affect the supply chain. From the delivery of raw materials to the labor needed for finished products, it is creating bottlenecks that contribute to these higher costs. This logistics logjam has also severely disrupted America’s ports, where goods from around the world wait much longer than usual to be unloaded and transported to store shelves, for want of workers at the docks and truckers to deliver them. Meanwhile, with ample cash in the U.S. economy, demand for goods has risen, exacerbating the imbalance in the supply-and-demand dynamic.

The Federal Reserve had maintained inflation would be a “transitory” blip on the screen, but for now, inflation seems stubbornly embedded in the economic landscape. Federal Reserve Chairman Jerome Powell recently stated in an appearance before Congress: "Most forecasters, including those at the Fed, continue to expect that inflation will move down significantly over the next year as supply and demand imbalances abate." He added, “It is difficult to predict the persistence and effects of supply constraints, but it now appears that factors pushing inflation upward will linger well into next year.”

New calibrations for new inflation rates Invested portfolios, including tax-advantaged IRAs, risk losing ground to inflation when asset growth is not able to keep pace with higher prices. Fixed income assets with yields set below the inflation rate are especially vulnerable. But even Social Security benefits, which are inflation-adjusted, provide a stark example of the impact a surge in inflation can have. In 2021, Social Security beneficiaries received a 1.3% cost-of-living adjustment (COLA), a boost that was quickly exceeded by the acceleration of inflation throughout the year. Payments received in 2022 will reflect an adjustment of 5.9%, which has already fallen behind the current rate of inflation.2

High inflation, if it persists, will force many investors to recalibrate their retirement planning assumptions. To keep pace with a 6% inflationary environment, it may require investors to set aside higher amounts for their retirement and could also lengthen their time horizon for reaching their inflation-adjusted savings targets. In essence, high inflation threatens to move the proverbial retirement goal posts as assets lose their buying power at higher rates than previously anticipated. The following chart illustrates how hypothetical increases at different rates of inflation could impact future spending power.3

In the meantime, the question remains: how much of this inflationary surge is pandemic-related and reflective of a short-term inflation surge and how much is endemic, marking the beginning of a new era? This shift in macroeconomic forces merits close attention as policymakers continue to contemplate the least disruptive approach for addressing the factors driving the inflation surge.

1 U.S. Bureau of Labor Statistics, Economic News Release, December 10, 2021 see:

2 Social Security Administration

3 Source: Millennium Trust Company

The material in this Blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Millennium Trust Company performs the duties of a directed custodian, and as such does not offer or sell investments or provide investment, legal, or tax advice.

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