Have the Inflation Conversation with Clients Now

Calm their fears by explaining what’s expected and how they’ll get through it.

By Luis Strohmeier

Inflation has recently become a major concern for clients. With vaccination progressing around the globe over the last six to seven months, and the accompanying widespread reopening of businesses, we’ve seen a slingshot effect for the economy. People who are vaccinated are starting to get out, travel and buy things. As a result, there are not enough goods or services to cover the demand, causing inflation to spike to 5% to 6%. However, inflation likely will be transient. It may last 15 to 18 months, but it’s unlikely to be sustainable at these levels.

Education on Inflation

Clients need to stay alert about inflation ― but at the same time, they should take the noise with a grain of salt. Remind clients that inflation is factored into their financial plans. Nothing exists in a vacuum, and inflation is expected over time. Also remind clients that inflation is actually a good thing. While the numbers we’ve seen over the last few months are a little out of the normal range, inflation is something they should already be preparing for.

In the past decade, the average Consumer Price Index has been around 2.4%. Over the next 10 years, it will likely be closer to 3%, so clients can expect a 20% to 22% increase to their cost of living during that time frame. To give a simple example, if someone is living on $1,000 a month, they will need nearly $1,250 per month to sustain the same lifestyle.

Most clients don’t understand inflation, but normalizing it and educating them on how it works can help quell fears. Once you demonstrate what inflation is, and that you’re planning for the impact, you’ll likely get fewer concerned calls from clients.
Pullout: “Once you demonstrate what inflation is, and that you’re planning for the impact, you’ll likely get fewer concerned calls from clients.”

Inflation means that economic growth is occurring. The alternatives are deflation or stagnation. Deflation means the economy is shrinking and stagnation means there’s no growth ― neither of which are good. We experienced deflation during the Great Depression, when people lost their jobs and homes, and very few bought goods or services because as the economy shrank, everyone knew they could buy things in the future at a discount.

Investing With Inflation in Mind

When it comes to preparing your investments, typically cyclical industries will feel the greatest negative impact from inflation, while non-cyclical industries will benefit.
Utility companies tend to do well during inflationary periods. They typically provide higher dividends than other industries and have a great deal of debt on their balance sheets. Debt gets eroded by inflationary processes and improves their balance sheet as the dollar loses value to pay back debts. Higher rates mean lower prices on bonds (debt).

Additional Reading: Breaking Bad: The Bond Market and Inflation 

Healthcare also benefits during inflation — outside of the pandemic environment — because it’s something that most people can’t put off. The last 18 months weren’t great for this sector, but overall, it tends to provide good dividends and improved balance sheets.

Cloud services and technology will also continually grow their earnings. And with more people working from home, employers are showing a big appetite for cloud services instead of spending on real estate, as office space is in less demand.

Planning for Inflation

Clients must realize that they are planning for a 20% to 22% adjustment to income over the next 10 years. Whatever the goal retirement number was before, they may need to adapt and be more prudent in saving and spending during an inflationary period. For instance, consider major purchases. If they are planning to buy a new car, home or vacation property but don’t need it right now, you can talk to them about waiting until inflation levels out.

This is an appropriate time to engage in potentially difficult conversations about what things are necessities and what can be cut. Especially in retirement, there may be obstacles that prevent clients from increasing their income to offset inflation.

“Clients aren’t going to sacrifice air conditioning during the summer, but their quality of life can be maintained if the non-essentials are cut for a short period.”

What is the other option? To reduce spending. Everyone has fixed and variable expenses. On a fixed income, think about the variable expenses that can be cut — perhaps gifts, vacations, shopping for clothes, or donations to their favorite charity or church. Clients aren’t going to sacrifice air conditioning during the summer, but their quality of life can be maintained if the non-essentials are cut for a short period. Walk through these concepts with clients and help them understand the long-term upside of cutting where they can now for the sake of a secure financial future.

Balance is Everything

We’ve had a good balance of high employment and low inflation for the past 10 years following the financial crisis. Largely, the stock market and economy have expanded to above normal levels, with a relatively low increase in wages. If inflation reaches a boiling point, then companies are forced to pay higher wages, which cuts into corporate profits. So, it’s not easy to have a perfect balance. In the next 10 years, slightly higher inflation and a slightly higher unemployment rate would actually be okay from an economic standpoint. Helping clients understand the delicate balance of inflation is key for their future.

Luis Strohmeier is a partner and wealth advisor at Octavia Wealth Advisors


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