By Joe Palumbo
The worry of inflation has been replaced with the anxiety of deflation. Since 2001 the Fed has dished out 12 interest rate cuts but has failed to jump-start the U.S. economy, which increases the risk to investors’ portfolios.
If we measure deflation strictly by market standards where portfolio prices and asset values have spiraled lower, then deflation becomes quite a concern. But is our economy really on course for deflation? The government tells us that inflation is at a 37-year low.
I don’t want to pull a Ronald Reagan ploy, but use it I must. When running for his first term, then candidate Reagan asked the voters if they were better off now than they were four years ago. In replicating the question it could be asked: Are products, goods and services lower than they were just four years ago?
Just a simple slice of pizza going from $1.25 to $1.75 represents a 40 percent increase. What about home and auto insurance, tickets to the movies, baseball tickets to a Mets or Yankees game and transit fares and tolls? And let’s not forget the recent real estate tax hike. We could go on with the new state and city sales tax hike, proposed water increase and gas and home heating oil.
Take a stroll through the supermarket and make a random selection of, let’s say, a box Cheerios. An average-sized box runs about $3.75. That’s an increase of 36 percent from four years back.
Have you brought your car in for maintenance or repair lately? Have you had to call a plumber, have your sewer cleared or been in need of an electrician? The average selling price for a house is now in the mid-triple digits, and two-bedroom apartments that were $900 several years ago fetch around $1,350 today. That’s a whopping 50 percent increase.
Ask families putting their children through college about tuition costs. Ask the owner of any construction company today how low their rates are and you just might get a bump on the head. I think the point has been made. So where are all these lower prices?
The only present area of deflation would be centered on the travel industry. Airfares are at a low, followed by a depressed hotel sector. Another area of decline is plunging interest rates to 40-year lows.
So how’s the business of deflation? With 10 items going up for every item going down, interest should be directed toward the sleeping giant of inflation.
Joe Palumbo is the fund manager for The Palco Group, Inc. and can be reached at firstname.lastname@example.org or 718-461-8317.