There are many compelling reasons to believe that U.S. inflation will remain elevated for several more years, and stocks may be your best option for long-term savings.
During the 1990s and 2000s, the average annual increase in the consumer price index was about 2%. Americans benefited from the digital revolution. Vast improvements in computing power, and easier access to software through the internet, cloud, and smartphones boosted productivity.
Meanwhile, globalization and economic reforms brought China and smaller Asian economies into the West’s supply chain — cheap labor for inexpensive coffee tables and computers. Unemployment in the West was a chronic policy concern, but that kept wages and inflation down even in non-traded services.
Now, all of that has flipped. Artificial intelligence is replacing the internet as the driver of change, while also posing quite different challenges. AI is tasked with replacing workers with complex skills and judgement, which will prove more difficult. Declining birth rates and partisan squabbling about immigration reform have created skilled labor shortages. Expensive college degrees often don’t translate into marketable skills. All this creates wage pressures — and inflation.
Economic reforms made China prosperous but also dangerous to the world order. Shifting manufacturing to Vietnam, India, Mexico, and other venues and reshoring semiconductor production is costly and inflationary.
Meeting the competing demands for a stronger military and social programs is driving up U.S. federal deficits. Those will force the Federal Reserve to choose between uncomfortably high interest rates or printing money to purchase the resulting debt.
Inflation in the U.S. more in the range of 3% to 4% than 2% is likely. As baseline inflation rises, so does volatility — spikes to 5% or 7% are more painful for consumers than spikes to 3%
All of this is tough on the aging U.S. population. Many other defined benefit pensions pose similar issues, as do many annuities.
Most Americans don’t receive defined benefits. They plan for retirement using tax-deferred accounts established by employers, or save through IRAs and similar vehicles. Historically, people have been advised to invest in equities according to the “100 minus your age” rule. If you’re 65, for example, that’s 35% stocks and 65% bonds.
Yet a spike in inflation and interest rates reduces the purchasing power of payments from existing bonds and the market value of those bonds for retirees who are gradually selling securities.
Higher inflation requires Americans to take more risk by investing larger shares in stocks— for example, an S&P 500 SPX index fund. According a
