Do Investors Need to Learn to Live With Inflation?

Inflation is a subject that's been top of mind for many investors lately. While some experts have called the current record-high inflation transitory, others think that it's time to put that term to bed. In this segment of Backstage Pass, recorded on Dec. 13, Fool contributors Jason Hall, Rachel Warren, and Toby Bordelon discuss. 

Jason Hall: I have an interesting take on this in a second, after you, Rachel. I'm saying that out loud so I remember the thing that I wanted to say about the thing that you just said. Rachel, you and I actually, we had a little bit of a debate going on.

Rachel Warren: A little friendly debate going on.

Jason Hall: I like that.

Rachel Warren: Yeah, me too. Look, I definitely think this is going to persist, to just give the short answer. I don't think it's going to just be gone come January. I think it's something that we're going to see eventually die out over time.

But also I think it's funny, the term "transitory" because I saw this interesting article about trying to define what is transitory. Because trying to define that term in the context of the current inflationary environment, I think it's like trying to pin Jell-O to a wall. [laughs]

It's just not an easy thing to do. According to the dictionary, transitory, there's not a specific period of time to back up that term. It's transitory is essentially a period that doesn't last that long.

Jason Hall: So it doesn't specifically say see Ecclesiastes?

Rachel Warren: No, it doesn't say Ecclesiastes or three-and-a-half months. I think depending on your point of view, the fact that inflation has been consistently on the rise for the past six months would mean it's no longer transitory, while someone else might see well it needs to be a few years before you could say it's no longer transitory.

I think the term transitory has been vastly overused. I don't think it applies to the situation we're in right now. I think when you go to the store or the gas station, you see the current prices in some instances, it doesn't feel transitory to the consumer.

I think it's also important to understand why inflation is the way it is. Inflation doesn't occur in a bubble. It's not a singular factor that's driving it, and it's happening outside of the U.S. as well in a lot of different countries.

For example, though, you think here in the U.S., well, red meat, that's one of the foods that has been sky-high in terms of price increases. Well, why is red meat so expensive? Well, production plants shuttered due to COVID earlier in the pandemic. Farmers had to thin their livestock inventory, and those choices made over a year ago, that has an impact more than a year in the future. You look at, well, why is --

Jason Hall: You're saying growing a cow is a [laughs] little different than pushing out a new iteration of CrowdStrike.

Rachel Warren: Yeah, just a little. Growing a whole cow. Yeah. You think of why is gas so high? You had a major supply-and-demand imbalance from lower production earlier in the pandemic, crude oil inventories are down. And then, for example, Hurricane Ida a few months ago seriously reduced drilling and refining capabilities in the Gulf of Mexico.

Jason Hall: One other thing with that, too, I follow that industry closely. We're dealing with the past five years of not investing in offshore resources. We're just paying the price of a half a decade of not investing in the infrastructure there.

Rachel Warren: Absolutely, I agree. That's just two things for example. There's a lot of factors, but I think it's going to take time to right. You look at those two examples, you look at gas and red meat prices: Those aren't things that can be resolved overnight.

That takes a lot of time, and so that's where I think that informs my idea of this isn't transitory. I think it's a term that's bandied about, but I think it's gotten a little well-worn. But I know you have a slightly different take, so I'm interested to hear [laughs] your thoughts.

Jason Hall: I do. I think the big thing for me with, and I've been thinking too much about this lately, I really have, but what I've come to the conclusion is that so we talked about the oil and gas thing.

We really are dealing with and it's not just what was shut-in in March and April and May of 2020 and the massive production E&P [exploration and production] cuts and the E&P budgets in 2020. It's the five years before that of under-investment in traditional oil and gas resources and all the focus just on shale needs constant capital to be thrown back into it just to maintain production.

Right, so that's that. Then you think about everything else that's happening. We're talking about the supply chain stuff. Guys, you know what's happening with consumer electronics? There is a very limited supply of semiconductors.

You know what the manufacturers are doing? They're putting the semiconductors in the expensive stuff. I can't find a $500 dishwasher, but I can find a $900 dishwasher. I can't find a $500 dryer, but I can find $1,000 dryer. It's the same thing happening with car stereos and computers and so many other things, is that the manufacturers are prioritizing their upstream stuff where they have margins. What's happening is the consumers are getting pinched. They're getting squeezed with that.

That's not inflation. It is inflation because people are having to pay more to get the thing that they want. But it's a weird, twisted version of inflation that is a direct reflection of the supply chain constraints in semiconductors and in other things that are coming from Southeast Asia that are getting stuck on container ships in the middle of the ocean because we can't get them through a port.

I don't think it's going to last forever. I think it's also a symptom of the fact that our entire global manufacturing base is like a high-performance athlete. There is no fat in the system at all.

There is no slack, there is no give, there is no excess capacity. Nothing. It's like a freeway. They build them as big as they need it and then subtract a lane because of budget cuts. Then what happens in rush hour?

One idiot makes everybody two hours late. Guests what? You do that on a global scale, and you have the inflation and the supply chain problems that we're dealing with right now. That's what we're going to work through.

Rachel Warren: I'm going to use that analogy from now on. [laughs]

Jason Hall: Say that again.

Rachel Warren: I'm just going to use that analogy from now on. [laughs]

Jason Hall: It's a great one. It is. I think it's a great one. But I do think we're going to work through it. I really do.

I don't know if it's going to take a mini recession where people -- we just have this global give up and stop buying, and people running out of the spare money, and we go through a period of flat GDP [gross domestic product] or even a small recession to fix it. Maybe that's what we need to fix the economy, is a recession. How dumb is that? I don't know.

Toby Bordelon: I wouldn't want the recession to fix the economy but --

Rachel Warren: No.

Jason Hall: No, because I don't think that's the right way to do it.