Photo by @timbatec at Unsplash

The financial and national media have finally latched onto inflation as the topic du jour. Typical. Lumber prices have dropped 22% in the last few weeks.

The big question really is not, do we have inflation, but is it transitory? By transitory, the Federal Reserve thinks that what will we see this year will be temporary due to pent-up demand from the Covid induced lockdowns and the massive amount of money the government continues to borrow despite the fact that we are in the midst of an economic boom. Ok, I added that last part. No one in the government wants anyone to actually think that their money printing has anything to do with this. Or that when you pay people to not work, that's actually what you get, people not working.

But transitory or not, the thing about inflation is, once prices or wages rise, they stay there. So whatever economic ripples we see from rising prices are pretty permanent too.

Lumber prices have dropped 22% recently, but don't hold off building or buying that new home expecting a price drop. Between labor shortages (i.e., wage increases), and gas (transportation) costs will easily offset lumber's inflation being transitory.

Inflation can be a hard concept to grasp in terms of its significance, especially to anyone under 60 who has never really experienced an inflationary economy. Think of it this way:

A Honda Accord cost $12,000 in 1990, they cost about $25,000 now. A Mustang was $9,000 and now it's $27,000. And yet the BLS, the curator of the official inflation numbers says that the price is unchanged, because of all the improvements they have made in cars since 1990. Given a choice, I'd rather spend $9,000 on a Mustang today, without the added computer chips.

Money has one function; we use it to buy stuff. And if you can't buy as much stuff in the future as you can buy today, then you have lost money. The only way to stay even is to be in a position where your wages continue to grow, or make sure your portfolio is designed to keep up.

Market Outlook

It's never a good sign when earnings are generally very good relative to expectations, but the market doesn't respond. That's kind of where we are now. Expect inflation numbers to settle for a quarter along with inflation investments, before we see a major resumption this summer.

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