Have you ever seen a 100 trillion dollar bill?

Have you ever seen a 100 trillion dollar bill?  You will in a few moments, because no discussion of inflation is complete without it, and that’s this week’s topic.

Prices go up. In the US, the things you bought in 1971 for $100 now cost $600. Well, some things – the legendary basket of goods that comprise the Consumer Price Index. That’s food, rent, apparel, transportation, medical care, education and some other items that most families buy. That bundle of goods has averaged a 3.7 percent price increase since 1971, a bit less the last decade.

But not all prices have behaved that way. In other categories, it’s been much worse. Or better, depending on your perspective. For instance, the price of gold has risen faster, up 32x. Shares in real estate investment trusts are up 51x. And the S&P 500, when including the reinvestment of dividends received over all those years, is up 55x

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The chart above helps to put the impact of inflation into perspective. This is a 42-year history. If you go back another 42 years the pattern is the same – the slow but relentless increase in prices far outpaced by significant, and more volatile, increases in security prices.

What has inflation meant to Americans? For some – anyone trying to pay for things with money stored in a mason jar for decades, or those on fixed incomes, or lenders who get repaid in dollars that buy less – inflation can be a big burden.  But for long-term investors, inflation is a malady that can typically be treated by doing all the things we regularly advise here – holding a diversified portfolio of low expense index investments representing a range of asset classes.

Can you even remember inflation?

Inflation used to be front page news, although a whole generation of Americans wouldn’t remember it. After the CPI peaked in 1979-80 at around 13 percent, (with the 30 year government bond at a plump 15.21%), inflation has been pretty benign ever since.

When inflation comes back – not if – what will it look like? Because double-digit inflation is so far out of memory, it won’t be pretty. When ALL the prices at the supermarket go up every week, expect strong reactions and screaming headlines. Inflation is always and everywhere a surprise, to paraphrase Milton Friedman. It can feel like the beginning of the end of the world, but for investors who stick to their plans, it is generally a survivable storm.

Unless, of course, things get really out of hand. Max brought quite a souvenir back from Zimbabwe…a 100 trillion dollar note. It’s real, and won’t buy much. (In fact inflation ran so rampant – 231,000,000 percent in the summer of 2008 – the country abandoned its national currency in 2009; the US dollar is the most common mode of transaction now.)

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Of course, super-hyperinflation like that is very unlikely in the US. We have too many safeguards and tools to regulate the economy. The Fed can and generally does keep inflation in a fairly narrow range. We don’t expect to see US ATMs dispensing billion or trillion dollar notes anytime soon.

For investors our advice is pretty simple: respect inflation, but don’t fear it. Don’t let short-term prices changes distract you from your long-term investment goals and diversified portfolio.



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