Inflation Is a Tax on Capital

Roben Farzad writes at Bloomberg Businessweek:

Longtime readers of BusinessWeek (now Bloomberg Businessweek) will recall its Dewey-Defeats-Truman moment: A 1979 A 1979 cover story that heralded the “Death of Equities: How Inflation is Destroying the Stock Market.” Inflation was the bogeyman of the late 1970s and early ’80s, an oft-cursed scourge to the average family’s buying power. The problem with BusinessWeek’s headline declaration is that it came shortly before the Paul Volcker Federal Reserve vanquished runaway inflation, setting up an 18-year bull market.

Since that bull maxed out 13 years ago, the market has pretty much gone to hell and back, twice. While inflation has been consistently in the low single digits, it hasn’t been as irrelevant as many investors imagine. Indeed, like termites coring out a wooden house, rising prices have already set them back a long way.

“Inflation,” says Crossing Wall Street‘s Eddy Elfenbein, “is a tax on capital and it slowly eats away at your portfolio. Even a low rate of inflation—say, 3 percent per year—compounds to 50 percent in less than 14 years. It’s proverbial running to stand still.”

In simple terms, if you were to take the Standard & Poor’s 500-stock index’s fin de siècle high and factor in the subsequent growth in the consumer price index, the market is 27 percent below its inflation (as the government defines it)-adjusted high. So much for the few percent we need to hit that market record you’re hearing so much about of late.

Posted by on February 19th, 2013 at 11:36 am


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