December 17, 2021

Recent reports show that inflation has ticked up to some of the highest levels we’ve seen in a long time. While there is no call for panic, this is definitely something to keep an eye on.

It has been decades since the United States has seen significant inflation. Many adults, including investing professionals on my team, have never experienced this, and that might make us more vulnerable.

Inflation erodes the value of savings and decreases confidence in the future. The business world relies on having some reasonable predictability in future cash flows, and investments become a lot more challenging when the value of those cash flows is uncertain.

Another danger is that inflation can quickly become a self-fulfilling prophecy, where the mere expectation of higher prices in the future becomes an engine that drives further inflation. This kind of feedback loop has me concerned that policy-makers are overestimating their ability to control the situation.

Over the past year or so, the government has increased the supply of dollars in circulation by something like 40%. At the same time, a year of pandemic has left households with a lot of pent up demand. That means there are a lot of dollars competing to buy goods, services, and assets.

Even if future spending returns to normal, price increases tend to be sticky for many consumer goods. It’s very hard for businesses to lower their prices, and even harder to lower salaries for employees who expect pay to only go up over time. Once prices go up, they almost always stay up, and that means today’s inflation is already getting baked into everybody’s expectations about the future.

Alliance is prepared to succeed in any market conditions. We have a great portfolio and deep expertise in a niche market. We know how to identify great deals and add value, and that means we can always find ways to succeed.

I’ll be keeping a very close eye on inflation so that Alliance is ready to take advantage of new opportunities as they arise.

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