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Inflation Explained… And The Future Opportunities It Foreshadows

For the past year or even a bit longer, the topic of inflation and anything related has led the evening news. In fact, it’s led the morning and daytime news, and if you still read them, it’s been on the front page of your local or national newspaper (or website). And every time it's mentioned, the question abounds: How high will it go, or when will it start declining? This got me thinking… Do we know what inflation is, and is it that bad?

Simply put, inflation happens when prices go up… leading to a loss of purchasing power. Anything from a constraint on raw materials to the cost of labor can cause higher prices. A perfect storm caused the most recent bout with inflation (that started with Covid). The powers that be flooded the world with money and simultaneously shut down the production of almost everything we use.

To put into the language of scholars, demand was increased dramatically while supply was tightened. It doesn’t take a scholar to figure out that this will drive people to line up at Costco for toilet paper deliveries! Or inspire people to buy and sell used cars via Carvana’s giant Pez dispenser at new car prices. That will happen when there are few to zero new cars to buy!

While this recent inflationary episode exploded in short order and now seems to be calming with similar lightspeed, inflation is with us pretty much all the time. It’s just not plastered all over the news or flying high like there’s no tomorrow. Prices historically rise nearly 3%+ on an annual basis. Somewhere along the way, you may have heard the Fed target for inflation is 2%. Good luck getting there, but the point is that inflation is always with us. We should expect prices to rise on an annual basis.

If this is the case, why don’t we notice it? Well, it depends on who you are (i.e., what you buy or sell). Because if you are involved in industries that forever go up in price, you most definitely notice inflation. You see that the historical 3%+ figure is for the entire economy. Whether you realize it or not, each facet of the economy does not move in lockstep. And thus, just maybe, this in lies potential future investment opportunities. Let’s examine…

This graphic depicts the many different parts of the US Consumer Goods and Services industry. It demonstrates the parts that consistently experience price increases and typically decline in price.

To understand this, let’s look at the two extremes. On the “more expensive” side, the cost of hospital services has increased by over 200% in the 21st century. In contrast, the price of your TV has declined by over 80% during the same period. What gives!?!? That’s an easy answer… Technology!

Your TV today is way better than it was 20 years ago. It is lightweight, hangs on your wall, has a tremendous picture, has a giant viewing screen (most likely), and, as mentioned, 80% cheaper than a comparable TV of the ’90s. Technology, in every way you can imagine, has made this happen. They are called smart tvs for a reason.

Now take hospital services. Have you visited a doctor’s office or a hospital in the past two decades? How much has changed? On the most basic level, do you wonder why you are still filling out forms with a pen? While technology is everywhere in your care (i.e., surgeries done by robotic arms, monitors, etc.), it almost seems like it is forbidden when it comes to all the administrative tasks… which are a lot!

When technology has not been completely implemented, the work still needs to be done. And in the case of hospitals, much of that work is done the old-fashioned way… by humans. Of course, I’m not advocating for robots to replace nurses, but a concerted effort to bring technology to the hospital will go a long way in suppressing the ever-rising cost of healthcare.

Luckily, as American citizens and investors, we live in a capitalist society that the most brilliant people in the world drive. And while sometimes I wonder why certain efforts have not flourished already, sooner or later, they do. As the great Jeff Bezos once coined: “Your margin is my opportunity.”

Healthcare and education have traditionally grown faster than overall inflation annually. This is due to less-than-efficient processes and the US Government’s need to fund both industries (we can dig deeper into that topic in another post). Look no further than the Apple Watch for a preview of how our beloved tech titans will enter these bloated industries. You can make the case that Apple is single handily keeping people out of the hospital with their health app(s).

I sense that Apple and its tech cohorts are just scratching the surface of the healthcare and education industries. We’ve seen new ways to educate people online, but tech firms that dive into higher education will go way deeper. I mean, do we think parents will continue to send their high school graduates to an overpriced university for 4+ years for a piece of paper that they can receive in a much more efficient manner?

For good or bad, inflation is almost always with us. It is real, even if you only notice it during extreme times. As investors, we welcome it for the opportunities it can present.


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