Do you know what hyperinflation is? It's what you get when inflation gets way, way out of hand. It's happening in Zimbabwe. In fact, what you can buy with a million Zimbabwean dollars right now might cost you twice as much by the time you finish reading this article. The country's inflation rate is estimated (conservatively, according to some) to be around 230 million percent.
You might buy a loaf of bread with a bill that sports 12 zeros on it. A month later, you'd need to add several more zeros. People are having trouble keeping up. It's causing chaos. And it's not a good environment for investors, either.
Fortunately, we don't have it bad like that. Inflation in America has generally been between 2% and 4% per year. In 1979 and 1980, though, it was around 13%, and it was around 9% in the years before and after that. Let's take 10% as an approximation of how bad we might expect it to get in America for a number of years, and see what that looks like, shall we? Let's start with a $5 sandwich in 2008 and see how the price grows at 10% over a decade:
|
Year |
Price |
|---|---|
|
2009 |
$5.50 |
|
2010 |
$6.05 |
|
2011 |
$6.66 |
|
2012 |
$7.32 |
|
2013 |
$8.05 |
|
2014 |
$8.86 |
|
2015 |
$9.74 |
|
2016 |
$10.72 |
|
2017 |
$11.79 |
|
2018 |
$12.97 |
Wow -- the price doubled after only eight years. A $20,000 car in 2008 would cost you nearly $52,000 in 2018! That's a big difference.
Are we in imminent danger of 10% inflation rates? I don't think so -- though inflation rates did recently spike when gas prices were soaring, along with many food prices. These days some are worrying about deflation, although it's not all bad.
Still, a big increase in inflation is often a concern to many, and even now some worry that it might be in our future.
Dangers of inflation
If inflation starts rising, many companies will suffer, and we investors will therefore be affected. We'll be affected as consumers, too. Journalist Robert Samuelson recently described 1979's inflation environment, noting that as prices rose quickly, people couldn't predict costs of everyday items and were concerned that their wages wouldn't keep up. As he put it, "Americans were horrified. ... People couldn't plan; their savings were at risk."
There are signs that prices will stop growing so rapidly in the coming year. Food commodity prices have already fallen. Assuming they keep falling, we'll eventually see prices fall for many grocery items from companies such as Kraft (NYSE:KFT), General Mills (NYSE:GIS), and ConAgra (NYSE:CAG), as well as institutional food services from companies like Sysco (NYSE:SYY). Of course, as the costs of their supplies fall, we shouldn't expect these companies to immediately slash prices. They'll likely amble slowly in their price-cutting, benefiting temporarily from heftier profit margins.
Meanwhile, if gas prices rise again, which isn't unthinkable, that will pressure the entire economy, as it will affect transportation costs for supplies and finished goods. And of course, the transportation companies themselves, such as FedEx (NYSE:FDX), United Parcel Service (NYSE:UPS), and Southwest Airlines (NYSE:LUV), will take a hit.
One way to fight inflation while investing is to seek out dividend-paying companies, which will keep paying you while the economy sorts itself out. Sticking with stocks in inflationary times can protect your retirement.
