We are accustomed to regular reports on the rate of inflation from the US Department of Labor. Inflation, measured by the amount of increase in the cost of commonly purchased goods and services as measured by the Consumer Price Index (CPI), has been running at a relatively low level for a number of years now. In fact, we finished 2020 with the CPI in the 1.4–1.6% range, well within what the Federal Reserve considers a manageable level of inflation for a recovering economy.
But there’s an interesting thing about the current rate of inflation: it is staying persistently low, despite the enormous amounts of money that have been pumped into the economy since the Great Recession and especially over the last year.

Normally, when a larger money supply is chasing the same or a lower amount of goods and services, we would expect the cost of those goods and services to increase, due to the law of supply and demand. But despite the dramatic increase in the monetary supply, inflation remains tame, in the view of the Fed.
Part of the answer may be that we are looking in the wrong place for inflation. Rather than measuring it by increases in the CPI, perhaps costs are increasing in other areas that aren’t included in the CPI: home purchases and investment income.
US housing prices, in the aggregate, rose 8.4% last year, and median listing prices for houses on the market were up 14.4%—two numbers that would be considered highly inflationary. And if we are looking for the pain caused by inflation, then you can point to the housing affordability crisis that is emerging in 2021. But the cost of purchasing a home, unlike rent, is not factored into the CPI, because when you buy a home you are acquiring an asset, not a consumable good or service.
The cost of acquiring income from an investment portfolio provides an even more dramatic example. When you consider that high stock prices reduce the value of dividends proportionately and low bond rates make interest income more expensive, the cost to “buy” $1,000 a year of income in the investment markets has risen considerably. Historically, if you invested $25,000 in a portfolio evenly divided between stocks and bonds, that portfolio would generate $1,000 a year of income. Today, to achieve that same amount of income from a 50/50 portfolio, you would need to invest roughly $80,000.

So, what is the answer? For one thing, this trend points to the tremendous value being held in real estate and investment portfolios. As long as the current conditions hold, these assets can be expected to contribute strongly to clients’ overall net worth. It may also indicate that retirees’ plans may need to include some spend-down of principal over time, rather than overextending the reach for yield by paying higher and higher prices for equity dividends or accepting lower credit quality in exchange for a larger bond yield.
If you have questions about how “investment inflation” could be affecting your portfolio or your plans for retirement, click here to schedule an appointment for a complimentary second opinion.
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