American Investment Services, Inc.

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Mar. 2022 – The Cost of Price Inflation

Economists contend that preferences among individuals are wide-ranging and that, generally, people should be able to make decisions freely. We are skeptical of policies that distort peoples’ choices because a cost is incurred when someone feels compelled to make a choice that differs from his or her preference.

Price inflation distorts our choices. During the hyperinflation of the Weimar Republic, workers rushed to cash their paychecks, only to waste time standing in line, before rushing to spend it as their purchasing power plummeted. Surely no one chose this frenetic behavior. But less severe inflation distorts behavior too. For example, as prices and interest rates trend higher, people who normally would prefer to rent an apartment on a short-term basis might feel compelled to enter a long-term lease or even assume a mortgage.

When it comes to investing, inflation distorts the risk-return tradeoff investors confront. Stocks have generally provided strong returns over long periods, even after accounting for inflation. Bonds, on the other hand, have not (see chart below). When inflation expectations are high, risk averse investors who prefer the relative stability of bond returns might nonetheless feel forced to load up on stocks. In effect, when forced to choose between a loss of future purchasing power and market volatility, these individuals often accept the latter, however reluctantly.

Our parent organization, AIER, has long championed sound money and inveighed against fiat currency regimes, in which money can be created “at the stroke of a pen.” We follow suit by urging investors to form robust portfolios designed to withstand expected as well as unexpected inflation. Our advice has not wavered. We are confident our long-term readers are well prepared.

Also In This Issue

How To Think About Inflation
A Reality Check: The Fed And Interest Rates
Negative Returns In Stocks And Bonds
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow Jones Industrials Ranked By Yield
Asset Class Investment Vehicles