In this video commentary, Tony Ogorek and Jeff Viksjo discuss when inflation can be a good thing.
Hi I’m Tony Ogorek, I’m here with Jeff Viksjo, and today we are talking about the big “I”, Inflation.
Why is some inflation good? We always think of inflation as bad. It certainly has been in the past, if it has been very high. But Tony take us away, why is inflation, at least some inflation, good?
I think you have to understand that 70% of our country’s economy is based on consumers and consumption. Now with inflation, the idea behind it is you want to buy things today with the expectation that they’re going to be more expensive tomorrow. The opposite of that is deflation, which means you probably aren’t going to want to buy anything today because you expect it to be cheaper tomorrow. If your economy is consumer-based, you really need some level of inflation in order for it to work well. We don’t want, obviously, inflation at 5, 6, 7%, but if you’re in the 2-3% range, that tends to work well for an economy. Now Jeff, we’ve got a couple of other points in terms of bonds and corporate profit to touch upon.
A healthy level of inflation, by that we mean somewhere around 2-3%, is good for corporate profits. And the reason is that wages tend to rise by 2-3%, employees expect that; to get an annual increase in wages. So if prices aren’t rising along with it that dents into the corporate profits. So some inflation is good, it keeps corporate profits strong. And third, it is good for debt holders. We talk about inflation eroding the purchasing power of savers, it does the opposite for debt. It makes debt easier to pay off. An example would be a 30-year mortgage payment is fixed for 30 years. So a good level inflation it makes that payment at the end of the 30 years a lot easier to make then the first one.
That’s why often times you’ve heard realtors tell you to get a 30 year mortgage. What they’ll say is to stretch as much as you can for a monthly payment because you will grow into it. What they’re really eluding to, is that your income’s going to go up, but those payments are not going to go up. Except for the tax component, which goes without saying.