May 07 • 3 min read
The problem with cheaper eggs
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"Will prices ever come back down again?" It's a fair question. But while falling prices sound like good news, in reality, they're one of the most damaging things that can happen to an economy. In today's email:
*** Before we dive in, did you catch this week's podcast? 👇 Falling Prices Sound Great. They're Not.Deflation is a sustained decline in prices across the economy. When prices keep falling, consumers and businesses do something perfectly rational but collectively damaging...they wait. Why buy something today if it'll be cheaper next month? That waiting starves companies of revenue. Margins shrink, layoffs follow, and unemployed workers spend even less, which pulls prices down further. It's a self-reinforcing spiral, and the most famous modern example is Japan. Japan's consumer prices barely moved from the mid-1990s to 2020.
And the Nikkei 225 — Japan's S&P 500 equivalent — didn't reclaim its 1989 high until early 2024...
...more than 34 years later!
That's why central banks tend to fight deflation more aggressively than inflation. A little inflation is healthy. A little deflation is an ominous sign. Slowing Inflation Isn't DeflationQuick distinction worth making, because the two terms get used interchangeably:
What we've largely experienced since the 2022 peak is disinflation. The Fed has been trying to bring the rate of price increases back to its 2% target; not push prices into a free fall. That's an important difference, especially when headlines start blurring the lines. So What About Stagflation?This is the word that keeps creeping into recent headlines, and it sounds disconcerting because, historically, it is. Stagflation is the rare combination of three things at once:
Think 1970s: incredibly high inflation paired with recession. What makes it so difficult is that the levers central banks pull to fight inflation tend to slow growth, and the levers that stimulate growth tend to make inflation worse. There's no clean fix. So the obvious question: Are we actually headed there? Today Doesn't Look Like the 1970sA slightly hotter inflation report and an uptick in unemployment are not "proof" that 1970s-style stagflation is around the corner. Some perspective:
Today's 3.3% inflation and ~4.2% unemployment don't live in the same neighborhood. Both numbers also remain well below their 50-year averages, and that 50-year window includes one of the strongest economic stretches in modern history. Real GDP growth is still positive, even after accounting for inflation. Yes, growth has slowed, but coming off several years of unusually strong economic performance, a slowdown was almost inevitable. For retirees, the more useful long-term anchor isn't whether the next inflation print is hot or cold. Why? Because over the past 50 years, the S&P 500 has averaged roughly 11% annual returns while inflation has averaged around 4%. Stocks remain one of the most reliable long-term hedges against rising prices, which is exactly why your retirement portfolio should include them. Bottom LineCould we ask for lower inflation, stronger growth, and lower unemployment? Of course. That would be ideal. But economies are rarely ideal — they ebb and flow. Today's environment is imperfect, but it's nowhere near the worst-case scenarios the headlines keep teasing. And history shows that staying disciplined through messy stretches 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® |