Brandy Auterson:
It’s now time for 4 Your Money. We’re joined by David Nelson, CEO of NelsonCorp Wealth Management. Welcome back, David.
David Nelson:
Thank you, Brandi.
Brandy Auterson:
We have managed to go maybe a month or so without a segment specifically focused on inflation. Now, given that it continues to be one of the main themes in the markets and economy, could you share any new thoughts on this front?
David Nelson:
Yeah, sure. Inflation clearly was the defining theme, as far as in 2021 last year. I think it’s going to continue to be front-and-center, as far as in 2022, as well. And there was a lot of optimism, coming into this year, that maybe we could get our arms around some of these backlogs, as far as supply chain issues. That clearly isn’t the case yet. We’re seeing that trend is continuing to be a problem, as far as trying to get the goods on the shelves, as far as in the store. So that’s really crucial, as far as for folks to understand and the impact that that can have.
David Nelson:
So I brought along a chart that’s going to give people, I think, maybe some insight of something that they’re not aware of. And most people, I don’t think, are aware of this, and that is when you talk about inflation in the CPI, which is Consumer Price Index, the cost of shelter is not factored into that. Never has been. Unless you’ve been living under rock, I think people are probably aware that home prices have been on fire over the last 18 months.
David Nelson:
And yet, what we see with the chart here, is it’s illustrating what I think might be a big concern ahead. And that is the red line on the chart shows the CPI, Consumer Price Index again. But what you see is a 7% rate attached to that. That’s the highest in 40 years. However, the blue line shows the owner-equivalent rent component of the CPI, which is only clocking in at 3.8%. And in fact, it’s really changed very little over the last five years, which basically is really unusual, considering that home prices have surged as much as they have.
David Nelson:
So looking at previous cycles, in the housing boom of say, 2000, we see that the owner’s-equivalent rent has tended to lag home prices, which is just a matter of time that this could come into play, as far as in this cycle.
Brandy Auterson:
Okay, so if we do see an increase there, what could that mean for other areas of the economy?
David Nelson:
Well, definitely, it’s possible that this is going to trickle through, as far as in the financial markets. We’re going to see higher interest rates, as far as that, are going to take place. If that happens, rents probably move upward, which then has less money in consumers’ pockets, as far as retail spending. So this is a ripple that we’re looking to. Don’t know for sure, but it sure looks like it. So less disposable income. Not a good scenario, but to summarize it, bonds could be under tremendous pressure in this environment that we’re illustrating. Real assets, commodities, and real estate could add to the gains that we saw from last year, 2021.