Jan 15, 2009

Inflation: Between Tsumamis

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By: Jim West

Inflation: Between Tsunamis

  What is our definition of  inflation?  Very simply inflation is the steady erosion of the purchasing power of our currency.  Our dollar tomorrow cannot purchase as much as it will today.   The American public has  come to accept inflation  as a chronic condition of our economic life.  It was  not even an issue that was raised in the recent election.  Our objective is to emphasize the profound impact this policy has on your financial well being and encourage you to take action to offset it.
 
Why do  we say  inflation is a policy of our government ?   Data from the governments own sources  provides the most substantial evidence.  The Consumer Price Index, produced on a monthly basis by the Bureau of Labor shows an average inflation rate of 3.1%. for almost a century. This 3.1% rate has become embedded into many aspects of our economic life.  If you are  a  business owner, it is probably built into the lease rates of the building you use for  business.  Often it is built into labor union contracts, government benefit programs, and has even been codified into the minimum wage law for the State of Washington.
 
Ric Edeleman the nationally recognized financial planner and author, speaking -during his weekly - radio broadcasts states that inflation may be the most insidious challenge we face today in building a solid financial foundation to sustain our income.   At 3.1% annual inflation, in ten years you will have lost one fourth of your  purchasing power and after a little over twenty years, you will have less than half the purchasing power you have today. 
 
Who is affected the most by inflation?  In the  September 2008 issue of Financial Market Strategies Newsletter, Eugenio  Aleman, of Wells Fargo Economics states that typically low to medium income consumers are, most affected, as they have no means to protect themselves.  They have the greatest challenge of producing more income, and the least flexibility in adapting their day to day spending.
 
Aleman emphasizes that "small and medium sized businesses are also severely affected by rising prices especially during economic weakness or recessions."   They  have limited ability to combat rising prices through volume purchasing and " their only option  is to increase prices to their customers .  For many small business owners the only alternative to raising these prices is going out of business." 
 
Doesn't inflation stay at about the same level?  In an article from USA Today in November of 2006, John Waggoner brings our attention to the idea that  certain areas of spending that significantly impact our lives often have inflation rates well above the CPI , for sustained periods of time.   " College tuition and fees were up 290% over the 20 years ending in 2006, about a 7% increase " says Waggoner.   "Medical care is up 174% during that same period, or about 5% and prescription drug costs close to the same".  Surging energy costs the past several years also are closing in on inflation rates close to 5%.   None of this takes into account 1) the  effects of the  "financial rescue package" that congress has recently put in place or 2) the additional steps the Federal Reserve will continue taking to prime the banking system with money to try and get the economy to rebound.     
 
 In his interview on October 1st of 2008 with Charlie Rose, Warren Buffett stated "inflation  is a likely consequence out of what's going on now.   We are in effect making  a choice between future inflation and getting off the floor. And, we're  likely to have more inflation in the future as a consequence of the things we do to fight the present situation." 
 
Small and medium sized businesses and investors are clearly at risk from this future inflation.   We have had a consistent policy for nearly a century that destroys half your purchasing power every twenty years.  We've had recent surges of inflation that have been even worse. The crux of Mr. Buffets comments  is we are  sowing  the seeds of  more  continued future inflation.  Now is the time to do some financial horizon scanning and chart a new course.  Don't accept that you have no options to fight inflation, and don't rely on the stock market as your sole vehicle for growth.  It is still very vulnerable and volatile. .
 
One of the most sound,  long term investments for creating and protecting wealth is property,   particularly in commercial cities.  With the growth of commerce and population, commercial real estate values grow as well, driven by  rents and lease rates that  adjust upwards over time.   An additional benefit of this asset class, is that since many properties are often held for long periods, ten or twenty years, their value is much more stable than the stock market. 
 
Well chosen and properly analyzed commercial properties, right in your own community make  excellent inflation hedges.  Specifically owner occupied commercial real estate, can provide wealth creation and protection, plus additional tax relief along the way. Harness the financial power of your monthly lease payment for your benefit.
 
The events of the past few months have created a window with property prices leveling out, and interest rates remaining low.   Inflation often has a lag time of eighteen to twenty four  months before it reemerges. We are in between tsunamis, with an opportunity to prepare to better survive and prosper during the next surge.