Economists say inflation has declined, but many consumers disagree. The disconnect is because economists and consumers are talking about different aspects of inflation, as SMI's executive editor Mark Biller explained last week on American Family Radio's Faith & Finance program.
Mark and host Rob West also discussed inflation's impact on prices, the economy, and the stock market.
Click the play button below to listen. Scroll down for the transcript.
Faith & Finance airs each weekday morning on American Family Radio. A different version airs weekday afternoons on Moody Radio.
(More radio appearances by members of the SMI team are posted on our Resources page.)
Transcript
Rob West:
Everyone knows what "inflation" means, right? Well, actually you'd be surprised to know how fuzzy some of that thinking really is. We've got Mark Biller with us today to explain it. And then it's on to your questions at 800-525-7000.
This is Faith & Finance on American Family Radio — biblical wisdom for your financial journey. (opening music ends)
Our guest, Mark Biller, is the executive editor at Sound Mind Investing, where they absolutely know what inflation is! He's a regular guest and contributor here, and we always look forward to our time together. Mark, great to have you back on the program!
Mark Biller:
Thanks for having me back.
Rob West:
All right, Mark, what's going on here? You recently noted a survey where people's understanding of what inflation actually means was all over the map, so why don't we begin there?
Mark Biller:
Yeah, that's right, Rob. So what caught my eye was this recent survey of 2200 people asking them how they define the term inflation.
Now, not surprisingly, just about everybody, 86% said they were worried about inflation, but when we got into what is inflation, some people thought inflation meant a rise in prices. Others thought it meant just high prices. There was a lot of general confusion about time periods and other details. So it was a really hazy picture that emerged from the survey results.
Now specifically, the survey found that fewer than half the respondents defined inflation as "a rise in the cost of goods and services," and that is actually the correct definition of inflation. Among the other responses, about 20% of people said that inflation just meant high prices. About a third said it meant that prices were rising faster than wages.
And people were asked if inflation was higher today than it was a year ago. Two-thirds said it was. Technically it isn't.
And a huge part of the problem is there is a fundamental disconnect between how economists and financial media talk about inflation and how normal people experience inflation. So economists talk about the "rate of change" of prices. And so they would say that rate of change peaked at 9% per year two years ago — summer of 2022 — and that rate of change has declined to about 3% today. So economists and financial types tend to say, "Yay, inflation has declined." But what they actually mean by that is that rate of increase in prices has slowed down from 9% to 3%.
Well, that's a totally different thing than prices actually going down! Prices aren't going down. They're just rising at a slower rate than they were a couple of years ago.
So, unlike the economists, real people experience inflation cumulatively. So they don't really care that much that the annual rate of inflation has round-tripped from 3% to 9% and back to 3% over the last few years. That's kind of the "Wall Street story" and implies that prices are getting back to normal and that's absolutely not the case. That's not what people are experiencing.
The "real-world story" is that the cumulative cost of this inflation adventure has inflation in total going about 25% higher from the aftermath of COVID four years ago. Prices are up about 25% — and that's true whether you're using the actual CPI inflation data from the government or sources like TruInflation, which tracks the changes in actual prices.
And the psychological impact of everything costing 25% or so more is just huge. We all remember this hasn't happened over two decades. This has happened over three or four years. So we all roughly remember what we were paying for things three or four years ago before this inflation spike. And we're painfully aware that everything we buy now costs so much more.
Rob West:
Yeah, no doubt about it. So suffice it to say it sounds like prices aren't going back down, right?
Mark Biller:
Yeah, that's unfortunately correct. The dirty secret of inflation is the prices almost never go back down. We've seen that inflation rate come back down, but that's just the pace of future additional price increases. So we're kind of stuck with this 25% bump higher. Now, of course, wages have gone up some, too, but nonetheless, it's been a big adjustment in a short amount of time.
Rob West:
Yeah, no doubt. By the way, we're going to dive into your questions here on the market and your investment portfolio with Mark Biller here in just a moment. So if you have investing-related questions, you can call right now and speak with Mark: 800-525-7000.
Mark, let's talk about this idea of inflation being "transitory." That's what we heard after the initial spike in inflation. Was that an illusion?
Mark Biller:
I'd say yes and no, Rob. The misunderstanding over that transitory word is largely the difference between this financial understanding of inflation versus the cumulative change that we've just been talking about.
Now, I will say I don't believe for a second that the Fed thought that the cumulative inflation would go as high or last as long as it has. But in the broad context, the rate of inflation was sort of transitory. It spiked from 3% to 9%, and then has come back down to 3% within a couple of years. So I mean, I guess if you squint, you can give 'em credit for that one.
But again, normal people really don't care about that. It's really the price level that impacts normal people.
And so, I would say, in grading their communication, it was pretty bad because, at best, I think the Fed knew that prices were going to go up, and then, at best, probably plateau at some higher level. And so that communication about it being transitory was problematic at best. It was borderline a disaster, given that inflation ran so far so fast. I think they could have done a much better job of communicating what people should expect.
Rob West:
Yeah, no doubt about it. Well, we'll continue to unpack this, including what does the future of inflation look like? How might that affect the economy and your stock portfolio?
Let's begin to take some questions today. Mark Biller here with Sound Mind Investing, and he'd love to weigh in on any investing-related questions while he is with us. 800-525-7000. We've got some lines open.
Let's go to Georgia. David, you'll be first up. Sir, go ahead.
Caller:
Thank you. Good morning and thank you for your ministry.
Rob West:
Thank you.
Caller:
So I am 61, about to turn 62. I am retiring from the federal government. I have, I don't know, about a million dollars in the Thrift Savings Plan and about $50,000 off in another company. My question is this: Could you compare for me — compare and contrast — Fidelity and Vanguard, keeping in mind my particular point in life and that I'll need to do a rollover and work with somebody that can enable things in the future, such as trying to invest or trying to take some of my money and put it toward my church charitable contributions over.
Rob West:
Yeah, very good. I will get Mark to weigh in on that. Just to clarify, though, I understand the question about Vanguard versus Fidelity, but are you looking as you roll this out, when that time comes, David, to hire an advisor to take discretion over this and make those decisions for you? Or did you have something else in mind?
Caller:
That's a really good question, and I understand that at least one of these companies has their own advisors. I have been looking at some of the — and I'm sorry, I'm trying to think of the ones that you guys always...
Rob West:
Yeah, the Certified Kingdom Advisors.
Caller:
Yes. So you can weigh in on that as well.
Mark Biller:
David, the biggest distinction in my mind between going with Fidelity versus Vanguard is Vanguard is kind of the premier index fund shop. Now, Fidelity also will do indexing, but Fidelity, their background, their reputation is a little bit more on the "active managed" side. So they have more active strategies. Vanguard has passive indexing as kind of their main focus.
You made a critical point in your question — maybe without even meaning to — when you mentioned that the charitable-giving side of your planning is very important to you. And one of the things that we hear all the time with our SMI Advisory clients is we'll have people who come over and become clients, and we'll start talking to them about some of the opportunities there are for charitable giving through things like Qualified Charitable Distributions — QCDs — and things like this.
And they're often blown away and surprised and we'll get questions like, "Why didn't my last advisor talk to me about these types of things?"
And I think, really, David, what it comes down to is a lot of advisors — one, they don't have a ton of interest in that from their secular clients, so it's not really on their radar, but two, a lot of advisors don't really want you giving your money away because most advisors are paid on a percentage of what they're managing for you. So if you're giving money away, that's effectively lowering the amount of assets that they're managing for you and lowering what they earn. And so a lot of advisors won't bring that up.
And so when you're asking about Fidelity, Vanguard, Schwab, these different secular companies, I think most of them will do a pretty good job for you — the big ones — with the financial nuts and bolts stuff. These guys know their stuff, they work with tons of clients. They're going to give you good counsel in those terms, but they're not necessarily going to be tuned into the specific things that are most important to you.
And so that's where coming back to a Kingdom Advisor like you hear about on this program all the time, or an SMI Stewardship Advisor, you're going to get a little bit of a different flavor and a different insight working with an advisor that shares your values than you are with someone where you're telling them, "This is what I want to do," but you may be one of the only clients that they have that really is pursuing that path. So they're just not as familiar, they may not know all of the way a Christian advisor would.
So I would say that's an important consideration. And at least when you're looking at advisors — sure, go ahead and talk to Fidelity and Vanguard, talk to their advisors — but I would also include at least one Kingdom Advisor and or SMI Stewardship Advisor as you're interviewing so that you'll get a little bit of a broader flavor of what's out there. Rob, I'm sure you've got a few thoughts here too.
Rob West:
Well, it's well said. And so now I really don't have anything to build there. I would just say if you want to find a CKA there in Georgia, David, just go to faithfi.com. You can learn more about SMI at soundmindinvesting.org. But does that cover it for you, sir?
Caller:
That is awesome.
Rob West:
Thank you so much. All right. God bless you, and all the best to you in this next season. We appreciate it.
800-525-7000 is the number to call with your questions from Mark Biller today.
To Mississippi, we go. Hi, Anne, how can we help you?
Caller:
Yes sir. I'm with Wells Fargo. I have about 300K, and I met with [my advisor] recently, which I haven't done in a long time — my fault mainly, I think. But they charged high fees to buy and sell. He told me he was going to buy this, he was going to sell this. He showed me the charts in our meeting on the computer, how it has gone down or up so far. But I wound up getting charged $1,300 worth of fees by the time he got through doing all that. That seemed awful high to me.
Rob West:
Yeah. Well let me just say Wells Fargo has some wonderful CKAs there, so it's a great institution in terms of a platform. But Mark, help her understand perhaps the difference between transaction charges and management fees and what might be appropriate.
Mark Biller:
Yeah. Ann, the whole advisory industry has gone through a pretty big change over the last 10 to 20 years. It used to be the most common way to charge customers was through commissions. And so when you would buy and sell, the customer would pay these fees, some of which would then go to the advisor or broker, and that's how they made their money.
Over the last decade or more, that has largely transitioned over to more of a flat percentage fee, where the advisor charges, say, 1% or whatever rate, on the amount of money that they're managing for you. And the reason people tend to like that is it aligns your interests with the advisor so that both of you want the account balance to go up because make more, if they're charging a flat, say 1%, if your balance goes up, they make more and, of course, you're happy because your balance is going up.
So it's hard for me to know for sure, Anne, what happened here. It could be that you are still in more of a commission-based advisory type of compensation structure. So I would ask about that. It could also be that the specific products you were in had some specific fees — like annuities will often have surrender charges and things like that. So it could be a mixture of those things. But I would just ask for clarity on exactly how you're paying these fees, and if that $1,300 is all you're paying for the year and your advisor's doing a good job for you, other than that, that's not too bad. But if that's a regular thing, you might need to look into that a little more closely.
Rob West:
That's well said. Ann, thanks for your call today.
Back with more — and inflation. We'll continue the conversation after this.
Rob West:
Great to have you with us today on Faith & Finance here at American Family Radio. Mark Biller has with us, been with us on the broadcast today. We're talking inflation. Mark is the executive editor at Sound Mind Investing. You can learn a lot more at soundmindinvesting.org.
Mark, going back to the topic of inflation for a moment, you were really helpful in clarifying for us what inflation is. And, obviously, based on where we started today with this massive survey, we see there's a lot of misunderstanding about inflation. You also helped us understand just how it's cumulative and even though it's been coming down, that's the "rate of increase," not necessarily any kind of falling prices.
But let's talk about where we go from here. What does the future of inflation look like in your view?
Mark Biller:
Yeah, it's a big question. Obviously, Rob, and I think it does matter whether we're talking about the immediate short term versus a little bit longer term. The last few months we've seen slower economic data. The economy seems to have been slowing just a little bit and right on queue, the inflation data has been coming down with that. That's pretty typical. And that is making people kind of excited that the Fed may actually be able to finally deliver on the interest rate cuts that they started promising back last December.
The problem, Rob, is that every time we've seen this happen over the last couple of years — we have a little bit of a slowdown, we see interest rates come down as a result. Well, that has tended to then kick economic activity back up.
We've got a lot of rate-sensitive activity in the economy. Think about people trying or wanting to sell their homes, but they can't because the mortgage rates are too high.
So interest rates come down a little bit. You get more people who say, "Okay, now I'm going to do it," and the activity picks right back up. We've talked in past programs about some of the parallels to the 70s, and one of the features of the 70s was we had these three big waves of inflation. Inflation went up, then came way down during softer economic conditions, only to then return and go back up again.
And I think that we could be moving in that type of direction, and that's based on some of the longer-term structural factors that have changed really over the last four years. One of those is just the inflationary expectations have really started to become embedded. We've had over three years of higher inflation, people start changing their expectations and behaviors. I think you see this maybe most clearly in the headlines you see from time to time about this or that labor union is turning down an 18% pay increase because it's just not enough to keep up with inflation.
And so that kind of keeps that spiral going. We've written a fair amount at SMI about some of these structural reasons why we think persistently higher inflation is likely to be with us for a while because of those things. The globalization trend reversing to a deglobalization reshoring, those are inflationary types of factors. War and conflict is an inflationary factor.
There are a number of these things, and so I won't be terribly surprised if, eventually, the Fed has to kind of cave and revise their inflation target higher from the 2% that they've maintained as their target now for a long, long time to maybe 3% or more. I think that we will have these pulses where inflation comes down, but I won't be surprised if we really struggle to drive that down below 3% long-term
Rob West:
Mark, if that's the case, does that mean then, looking out over the next decade, that we may need to settle for lower average annualized returns versus what we've experienced the last 20 years? And could that present a "stagflation" situation where we have higher than expected persistent inflation with slower growth?
Mark Biller:
It certainly could. One of the things that higher inflation doesn't necessarily imply slower economic growth, but when they do come together, that's really the double barrel doozy that you want to avoid. One of the misconceptions about the 70s was that the whole decade was slow growth. And if you go back and look at it, that really wasn't the case. We had really high nominal growth, we just had really high inflation as well. So that's a little more manageable.
Towards the end of that decade is when we started to get into the stagflation and the malaise that kind of colors our view of that period. You definitely could see that, though, on the investing side. One of the features of the 70s was that through that long period of inflation, in nominal terms, not inflation-adjusted terms, the stock market was basically flat from 1968 to 1982 and it lost about 60% of its value after inflation.
So we do have to have our eyes open to the possible investing implications of higher inflation. That's one of them. The other big one is that bonds tend to be really poor performers in inflationary environments, and that's just because if you think about what a bond is, it's promising you a fixed rate of return. The interest rate, well, if inflation is eating away the value of that interest rate, then that's a bad setup. So bonds could definitely be a challenge.
It's not all bad news though. Savers for the last couple of years have really enjoyed the higher interest rates, getting 5% on these savings vehicles after getting close to zero for the last decade. That's kind of the upside.
And I guess as we're rounding out the investing implications, I would just say that you also have a better setup for "real" assets. Things like real estate and gold — commodities of all types, really. The type of real stuff that makes your toe hurt when you drop it on your toe. Real stuff tends to go up in value along with all these other prices.
So commodities, energy, stocks, those types of tangible assets tend to perform really well. They have over the last couple of years, and we think that'll probably continue. So we've been emphasizing commodities and precious metals slightly pulling back on bonds as a way to offset the impact of higher inflation and corresponding higher interest rates that usually go along with it.
Rob West:
Mark, we don't have a lot of time left. I'd love to just quickly get your thoughts though — I mean, as we look at this through a biblical worldview, when we think about God's Word, it talks about "just" weights and measures. I mean, is this "easy money" that led to inflationary environments like we're in now counter to Scripture because of the impact on the poor and others, in particular?
Mark Biller:
Yeah, I think that's a strong case to make that that is, in fact, the case. And there have been decisions that have been made that, in hindsight, really look like they were poor ones or at least questionable. Coming out of the great financial crisis in '08, we chose to kind of bail out the financial system and direct most of the recovery support to the financial system — which really pushed those asset prices higher. And then in COVID, the direct stimulus really pushed general marketplace prices higher.
So some of this has been policy-driven for sure.
Rob West:
Very good. Well, we're going to have to leave it there for today. Mark, this has been enlightening. We always appreciate our time. Thanks for stopping by, my friend.
Mark Biller:
Thank you, Rob.
Rob West:
Folks, you can learn a whole lot more about Sound Mind Investing. It's soundmindinvesting.org. soundmindinvesting.org. Back with more of your questions on anything right after this.
