Some Inflation Is Better Than None

A few weeks ago, at a socially distanced backyard lunch, my recently retired friend Richard, a cautious saver and investor bemoaned the pittance his and other banks pay depositors.

- Jeffrey R. Kosnett

Richard noticed the government’s monthly inflation reports are trending higher—the consumer price index rose 0.4% in August, following hikes of 0.6% in June and July—and remarked that banks will soon charge borrowers higher rates but offer no comparable consideration to savers. He then asked, “Why not transfer big bucks to higher-yielding stuff, such as preferred stocks and corporate bonds?”

Why not, indeed. I commiserated about bank yields, but I also raised the concern that inflation might be tracking higher than it appears, especially considering indicators such as industrial wages and transport and warehousing costs, as well as the price of materials such as lumber. Price gyrations in such items don’t directly infringe on the daily lives of consumers, but they can menace the market value of higher-coupon and longer-term fixed-income investments. Even mild bumps in wholesale prices, not to mention amorphous rising-inflation “expectations,” can spark surprise sell-offs.