Retirement Living may soon be challenged by Rising Inflation
Friday, July 16, 2010, saw the release of the consumer price index and as noted by Goldman Sachs analysts, while the index was actually down .14 percent in June and up only 1.1 percent for the past 12 months, “core inflation” was a bit stronger than the analysts had expected. Of particular note was a rental index that rose .1 percent in the past month with “lodging away from home” up 1.3 percent. This confirms what I have heard anecdotally that people are vacationing and travelling again and obviously willing to pay up for this privilege for the first time in a couple of years. A small piece of additional evidence entered my world this past weekend. When I called to cancel a reservation at the Cedar Lodge just outside Yosemite, they told me they were going to charge a $7.50 cancellation fee! This is a first for a hotel (rather a 2-3 star motel) in my experience, given they had a week’s notice. The travel industry rivals bankers in their assertion of garbage fees, and apparently they now feel confident in getting away this nonsense-witness the bag charges imposed recently by most major airlines!
Frankly I think the government inflation report belies the early stages of returning inflation to the U.S. economy. As with the afore mentioned travel industry price increases I have noted in my own experience some significant price increases that belie the apparently tame government-reported inflation figures. For example:
1. In January, 2010, cost of parking at my physician’s office rose from $2.00 an hour to $3.00 an hour (a mere 50 percent increase in one fell swoop).
2. The movie theaters have instituted an adult ticket price increase from $10.00 to $12.00 a mere 20 percent price increase on the heels of the worst recession in three generations.
3.The price of a fish taco at many independent Mexican restaurants is now approaching $3.00. Not long ago, this was a $1.75 ala carte item.
While these price increases, cited above, represent smaller ticket items, the magnitude of the price increases is ominous. Friday’s consumer price index decline noted that is was largely due to energy price decreases (huh?). We in California have seen no such decreases in the price of gasoline. What the government is likely talking about is “seasonal adjustment”. Since petrol prices tend to soar with the Summer driving season, and have not done so this year, the wonks at the Labor Department consider this a price decrease.
Finally, the cost of medical insurance is scheduled to rise by about 14 percent here on the west coast.
The point of this discourse? Despite what the government may be telling us, inflation continues to be the number one threat, particularly to retirees. Those who are not lucky enough to have a pension that is adjusted for inflation (i.e. retired government workers) will have to make the money they have saved work harder or they may have to go back to work. The cost of living has never gone down for any sustained period of time, since Keynesian principals of inflationary government intervention were instituted after World War II. The good news side of this story: it appears we are not in danger a deflation or double dip recession. Top line growth may be sluggish, re-hiring is painfully slow, but when businesses are able to impose price increases, this is usually evidence that they are retaining customers and regaining additional business. However, I suspect we may be walking into the unpleasant world of “stagflation”. A term coined in the mid 1970’s when a sluggish economy was accompanied by rapidly rising prices.
While I’m not seeing much reaction from financial instruments to this news, a three month increase in the reported rate of inflation, when it appears, will, I believe, begin to have an effect on the pricing of key financial assets, especially fixed income instruments. The anecdotal, steep price increases cited above are a harbinger of things to come.
As our clients are heavily invested in fixed income investments, we’ll be watching to see if a change in allocation to this sector is appropriate.
