Should You Be Worried About Inflation?

Tired of inflation? You're certainly not alone. In this segment of Backstage Pass recorded on Jan. 28 and featuring Fool contributors Jon Quast, Jason Hall, Rachel Warren, and Toby Bordelon, Jason and Jon discuss some key metrics that put the rising rate of inflation in perspective as well as a few companies that are proving to have incredible pricing power to ride out this current period. 

Jon Quast: I will say, I'm not worried about it, if you want to throw that word out there about inflation because the country has gone through periods of inflation in the past and guess what, the world keeps spinning.

Everything just keeps going on. I do say, I do feel for people who are perhaps on a fixed income, like you said, we are seeing it more at the pump, at the grocery store and if you're on a fixed income, we live in an area where it's a lot of elderly retirees and they are on that fixed income, man, are they feeling that pressure a lot more than someone like I am where I'm in, my income is variable.

Definitely it's something to, I don't know. It's something I am feeling for other people who are in that position. I will say that I totally agree with you depending on what you meant by this. I don't think that prices are going back to what they were by and large, so like, for example, rents. Rents have gone up in 2021.

If you look at the data, I believe it's only two years since 1973, have rents ever gone down year-over-year? I mean, once rents are raised, they're raised and I wouldn't expect any landlord out there to go back to what rents were before, so that is inflation right there and they're saying double-digit rent growth in 2021 based on some preliminary estimates and that is historically very high. We haven't seen that since the '80s.

The other data point that I wanted to point out is wages. Wages have gone up, let me see, here it is. This is just some YCharts data. This is your quarter-over-quarter wage increases and I have it set on max here, it looks like the YCharts data goes back to around 2000 or so.

But if you look at the private sector, that's the purple line, the largest spike in private sector wages in this data here, also for civilian workers in the blue.

When you see wages go up, that's another thing. I don't think that you drop them in 2023. They went up and they're going to stay up, but then that all gets passed down through the system, so the inflation that has happened, has happened. I think the rate of inflation might slow down, but what is done is done.

Jason Hall: I guess I'm supposed to weigh in too here right?

Rachel Warren: You might want to Jason, you know? 

Toby Bordelon: I'm curious to see what you think about it, I know you have some thoughts.

Jason Hall: I do. You know it's funny, so like I think about inflation and transitory. I still think it's going to be relatively transitory. I don't think this is going to be a multi multi-year thing. I really don't, I don't think we're going to see inflation stay at above average rates for a long time.

I still really think that we see this like there's just this crazy confluence of events that's behind so much of it and the biggest thing and I think it's the biggest thing that we don't maybe talk about enough, is that how fundamentally the supply chain has changed globally over the past three decades. There's no slack in the system anymore. There's no fat in the system whatsoever.

It is almost all just-in-time manufacturing, it's your parts, your supply comes in from your suppliers and within days it needs to be on an assembled product. If it's not, then you're wasting money, you're not leveraging it, you're not getting the best cash-on-cash returns as you can, it's all about turns, it's all about turning that money over and here we are. I mean the bottom line is that, everything that's happening with the automotive industry, is because for like four months the auto manufacturers didn't accept any semiconductors.

They stopped ordering them, and then when they said we want to order now, they got pushed to the back of the line, because other companies said, oh we'll take them, you know what, we need them and it's not a one-for-one thing, but like, I'm a webcam manufacturer.

Taiwan Semi, Samsung, you mean you have a big opening now because Ford doesn't want chips?

Those are just random examples I'm throwing out there. But that's the basic mechanism that's happened. Those factors continue to make semiconductors, Ford and GM and everybody just got put at the end of the line. That's just a thing that has happened and I think we're going to work through all of that.

But I think, like thinking about it as an investor and thinking about sentiment, consumer sentiments, like, I mean I look at the market, it's hard to see it. But you see on this, on the yellow line, a lot of times, like that's the S&P 500 and the purple is consumer sentiment.

There was almost always like a little bit of a leading indicator with sentiment and when consumer sentiment was at the bottom, or had fallen sharply, people that went out and invested a lot of money did really, [laughs] really well for like the next few years after that.

I think about that and it just reminds me that with so many of these metrics and with so many of these measures, they can be so damn distracting away from what the goal is and what do we know?

We know inflation is really high. We know so far consumers have been able to suck it up, and soak it up and continue to spend money. We know that there's a lot of capacity coming online for the stuff that we don't have enough of. We know that stocks have been the best way for us to invest like forever.

We know a bunch of stocks have fallen. You know what that means? That means we know what we should do. We should invest more, right now, in great companies and then just get the hell out of the way and stop worrying about all this other stuff.