The inflation figures for March came out last Wednesday. Yikes. Just when you thought it was safe to retire. I am often surprised at some of the punditry surrounding the release of inflation data. First of all, you should know that we really don't have an accurate feel for the inflation data until at least six months after the fact. The Labor Department releases figures about two weeks after the end of each month, and often revises those figures down the road sometime later.

Nonetheless, I would consider the year-over-year inflation figure of 4.0% to be pretty reliable. The commentary accompanying that figure (from Wall Street, mostly) is largely focused on the fact that most of the 4.0% is attributable to only two categories: food and energy. The implication here is that we shouldn't care about this high number since so many of the categories saw modest inflation. This is a naïve and short-sighted point of view.

In the fullness of time—meaning, over your remaining years of life—energy is ultimately the root cost input to everything we buy and do. The story of the advance in human standards of living over the millennia is the story of our ability to harness and process even larger amounts of energy, per capita. We have gotten very good at harnessing energy, at an ever-lower real cost. If the price of energy is going to rise faster than other goods and production inputs, all prices will eventually rise.

If you're a working stiff like me, you hope that your wages rise along with prices. If they do, then there isn't too much to worry about. The 1970's weren't fun, from an economic perspective, but life went on and here we all are today. That assessment is tainted by what statisticians call "survivorship bias." Survivorship bias is best illustrated by imagining that you asked a room full of bicyclists to raise their hands if they have ever had a fatal accident due to not wearing a bike helmet. No hands go up? Then you conclude that wearing bike helmets is not really necessary.

Concluding that we all got through a past inflationary period just fine forgets that those who did not get through the period just fine aren't around to remind us of the fact. Somebody who retired at age 65 in 1968 saw his stock and bond portfolio nearly destroyed over the ensuing 15 years, and he's not around any longer to serve witness. There also weren't as many of those folks, as a percentage of the population at the time. So we tended not to notice them. They lived in the spare room in the homes of their grown kids.

Inflation is the real deal, my friends. It is a corrosive tax on accumulated wealth that cannot be dodged, deferred or sheltered. Ten years of inflation at 4.0% will wipe out fully half of the value of your accumulated wealth. Investment strategies absolutely, positively must be built, ensuring that your investment returns stay one step ahead of inflation.

–Rick Ashburn, CFA, is Chief Investment Officer of Creekside
Partners Investment Counsel in Lafayette, California. He has managed
investments for institutional and private clients for 23 years. Visit
his website at creeksidepartners.com, or e-mail him at rick [at] creeksidepartners [dot] com.

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posted at 07:28:33 PM