Did the Internet Wipe Out Inflation?

3 Minute Read

An interesting theory is making its way through investing circles to explain why inflation and interest rates have remained so low for so long….the internet!

Inflation is the rise in the prices of goods and services over time.  Let’s take a look back to the cost of living back in 1960:

New House $12,675
Average Income $5,200/Year
New Car $2,610
Movie Ticket $1
Gasoline $0.25 per gallon
Stamp $0.04
Eggs $0.30 per dozen
Burger $0.58 per pound
Milk $1.04 per gallon
Bread $0.20 per loaf

The measure of inflation is important because if your investments make 10%, but inflation is 7%, your REAL return, hypothetically speaking is only 3%.  High inflation can be damaging to an economy, but some inflation is considered good, almost like greasing the wheels of capitalism.

Historically speaking, higher inflation comes with an expanding economy and low unemployment, the exact economy the US is experiencing.  Only one problem, there is little to no inflation and economists are baffled.

Current inflation is coming in at 1.8%, and expected to hover around 2% for the foreseeable future.  Some argue these readings aren’t accurate and inflation is even lower.

Did the internet wipe out inflation?
Interest rates follow inflation and the current 10-Year US Treasury is only yielding 2.4%.  This means that traders expect low inflation and interest rates to last for the foreseeable future.  Proponents of this theory argue that the internet has wiped out inflation through:

  • Transparent pricing across industries.
  • Amazon’s effect on brick & mortar retailers.
  • Technological & software advances increasing worker productivity.

These factors along with the decline in union representation (less wage leverage for workers) frame the argument that low inflation and interest rates are here to stay.

If this is the case, what does this mean for us as investors?

  • While stock market returns may trend lower long-term, REAL investment returns could remain the same if inflation stays muted.
  • I continue to prefer short-term bond investments, they are yielding the same 2.4% but allow for flexibility should inflation and interest rates rise.
  • I recommend staying with mostly with high quality bonds such as US Treasuries, CDs and A rated companies.
    • Investors will sometimes make the mistake of “Reaching for Yield” by investing in bonds from low quality companies, those with shakier prospects of paying the money back.  This is what fueled the housing crisis, investors lending their money to subprime borrowers for a few extra percentage points.

My philosophy for managing client portfolios is not to try and predict what will happen near term, but rather position client portfolios to be adaptable, and potentially take advantage of opportunities in these ever changing markets.

I hope this was helpful, as always if you have any questions please don’t hesitate to contact me at the office.  Have a great weekend!

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