Feb 06 • 3 min read
Inflation's surprising plot twist
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If you've been paying attention to inflation headlines, you'd think things are still spiraling. But inflation has been below 3% for two years now...not exactly the crisis narrative we keep hearing. What's even more interesting is what happened over the past year. Tariffs were expected to push prices higher. Profit margins were expected to shrink. The economy was supposed to slow down. Almost none of it played out the way most people assumed it would. That pattern is worth understanding, especially if it's influencing how you think about your money. *** Before we dive in, did you catch this week's podcast? 👇 Surprising Things Happen All the TimeDespite the fact that inflation has stayed below 3% for the last two years, it continues to be a popular topic of conversation and concern. That's understandable. Compared to the zero-interest-rate era of the 2010s, inflation has felt high, averaging 4.5% over the last five years. But you may be surprised to learn that, when we zoom out, this isn't far from the 3.8% average from 1960 to 2024. Of course, the doom-and-gloom media hasn't helped our perspective, and neither has our personal experience at the grocery store. As you can see below, the price increases of at least three grocery staples have been dramatic, nearly tripling our general inflation rate (or more) over the last five years. Because we see and feel these increases so frequently, they reinforce the idea that inflation remains out of control. But taken as a whole, grocery prices have risen in lockstep with general inflation, both up about 25% over the same period. That's certainly not fun, but it's not as out of line as we've been led to believe. I share this context as a backdrop for what's surprised me most about inflation (and a few other things) over the past year. Back in April, when tariffs were rolled out, it was a reasonable assumption that inflation would spike again. Higher producer costs—which tariffs cause—are generally passed along to consumers over time. Had that spike materialized, it would have been equally reasonable to expect a market decline similar to 2022, during peak inflation. Well, as you already know, neither of those expectations has come to fruition; at least not so far. Inflation has been stable, declining to 2.7% as of the most recent reading, and the stock market has risen dramatically since the initial tariff announcements. Beyond that, profit margins, which were also supposed to take a hit, are now at all-time highs. And real GDP growth in the third quarter came in at 4.4%, the highest since 2023. This combination of events was virtually unfathomable in April. Which begs the question: How was this outcome even possible? In short, the economy and the stock market are far more complicated than people like to think. Just as inflation doesn't inevitably result from a single policy decision, the economy and markets are driven by countless moving parts. Outcomes that feel inevitable and obvious often fail to materialize—at least not in the way, or on the timeline, we expect. So beyond embracing the reality that surprising outcomes (both good and bad) happen all the time, what else can we take away? It reinforces why we build long-term financial strategies using a very specific framework 👇 Purpose → Plan → Portfolio Your purpose and goals define the scope of your plan. Your plan then determines how your portfolio is constructed and allocated. Bottom LineNotice what’s missing from that process: headlines, forecasts, and real-time economic predictions. That omission is intentional. Your goals, combined with a rational understanding of history, are far more reliable inputs for building a durable financial plan than reacting to news cycles or trying to anticipate the next economic surprise. And once that plan is in place, your primary role is stick with it. That’s why you’ll continue to hear me emphasize “stay the course.” Not because surprises don’t happen, but because they do! And history shows that staying disciplined through them is one of the most powerful advantages long-term investors have. 📚 What I've Been Reading
Thank you for reading! Please reply to this email with comments, questions, and/or feedback. Stay wealthy, Taylor Schulte, CFP® |