In medieval England, Robin Hood was known to rob from the rich and give to the poor. These days, the closest thing to Robin Hood is inflation. It robs from the old and gives to the young.
The fact is, retirees face gradually rising prices that can erode their standard of living. Younger people too, of course, face rising prices. The difference is that young people’s salaries and hard assets (such as gold) can rise over time and keep up with inflation. No wonder, then, that so many investors saving for retirement are worried about inflation.
Then again, we expect the five factors outlined below to keep a lid on inflation in the years ahead. More important, it’s possible to beat this latter-day Robin Hood with stocks that increase their dividends faster than the increase in prices.
Five factors working against inflation
1. Productivity Gains. Productivity (output per employee, by one measure) has made stronger gains these past few years than in the 1970s and 1980s. That’s partly because of technological advances (artificial intelligence, the Internet, automated banking machines and so on). Also, many people now know how to make better use of these technologies. Increased output means that businesses can afford to absorb higher costs and, in many cases, not raise prices or pass along cost savings to consumers.
2. Unemployment remains high. COVID-19 and the accompanying global recession has driven up unemployment in Canada and the US. Even when the recovery comes, unemployment may remain high. That’s because of productivity gains. Rather than leave themselves open to rising wage demands, more and more employers expand by spending money on more productive equipment, rather than hiring new workers. The sad truth is that as long as workers worry about losing their jobs or finding themselves replaced by technology, they’ll temper their wage demands. This likely accounts for more moderate wage gains and fewer strikes than in the 1970s and 1980s.
3. International trade. International trade continues to grow despite setbacks in times of global recession. This acts to keep prices down and keep manufacturers on their toes. Indeed, if North American manufacturers try to gouge consumers or fail to meet their needs, they’ll lose more market share to, say, low-cost imports from Asia and elsewhere.
4. A rising Canadian dollar. Low-cost imports become even cheaper when your loonies rise. In fact, the gradual rise in the Canadian dollar this year helps explain why seldom-seen deflation occurred. While it’s difficult to predict long-term currency movements, ‘purchasing power parity’ (used by economists) suggests that the Canadian dollar is now becoming more fairly valued instead of remaining deeply undervalued as it was for many years.
5. The aging population. As people age, they tend to spend less. They’ve usually paid off their homes, they already own all the appliances and furniture that they need, their children have moved out on their own and so on. A lower level of spending tends to translate into more saving. Less spending and more saving both work against inflation.
Individually, none of these factors could likely contain inflation. When we look at them together, however, we see that they outweigh the risk of serious inflation this year and next. Especially since pandemics are associated with low interest rates. But inflation is always a threat.
The best way to deal with this threat is to own a portfolio of stocks that increase their dividends faster than inflation, year after year.
This is an edited version of an article that was originally published for subscribers in the August 21, 2020, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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