Your Baby Boomer Clients and Inflation

Your Wealthiest Clients Are Wary Of Inflation         

Are we in an upward inflationary spiral? No. But your Baby Boomer clients lived through “The Great Inflation” of the 1960s/1970s, and that experience seared them. So, I can assure you they noted the 5% increase in inflation in August of 2021 and continue to watch that number.

 You may have already received communications from your clients in this generation about inflation because they lived through the era and know the damage inflation can cause. Your firm will have provided you with their view of the inflation we are undergoing. Keep this handy on your desktop or wherever you store essential investment research.

It’s no accident that Baby Boomers are sitting on the largest pile of private savings in the U.S. or that forty-one percent of Baby Boomers have paid off their mortgages as of 2017. [1]  Most of us feel we can’t save enough.

Between 1970 and 2021, the stock market had high nominal returns, but a lot of that came in later decades. Adjusted for inflation, the annual return on the S&P 500 in those years was 6.82%. [2]  While this is a good return, we think we are getting higher returns than this, but we aren’t. You need to remember inflation because your Baby Boomer clients remember it.

The majority of Financial Advisors didn’t live through the 1970s as adults. Had you done so, you would understand the inflation fears of your Baby Boomer clients.

The Great Inflation (1965 to 1982) was the defining macroeconomic event of the second half of the twentieth century. Over the nearly two decades it lasted… there were four economic recessions, two severe energy shortages, and the unprecedented peacetime implementation of wage and price controls. [3]

Hence, you need to understand that the inflation we are experiencing now results from black swan events. It won’t last for two decades. It’s important to make your Baby Boomer clients aware of this.  The “Great Inflation” resulted from a perfect storm of negative economic factors that are not present now.

Here is what many of us well remember from those decades:

• Interest rates skyrocketed. From January 1972 through January 1982, the interest rate on a fixed 30-year mortgage went from 7.44% to 17.48%. [4]
• From 1972 until 1980, the CPI (Consumer Price Index) rose from 3% to 15%. So, in eight years, prices across the board went up by 12%.  
• In the 1970s, differences over foreign policy between the U.S. and Middle Eastern countries caused two embargoes on oil exports to the U.S. by OPEC (Organization of Petroleum Exporting Countries), which resulted in nationwide shortages of gasoline. In the first embargo, the price of oil went from $2.90 a barrel in October of 1973 to $11.65 a barrel by January of 1974, almost a 400% increase.

Inflation had started to creep into the economy in 1965, and the oil embargo of 1973 triggered massive inflation across the board. Not only was our economy more dependent on gasoline in those years, but U.S. oil production had declined significantly. To bring supply in line with demand, prices shot up. In 1979, another oil embargo occurred, and the price of oil doubled in the twelve months from April 1979 to April 1980. These two events alone drove inflation, but many other increases in the cost of goods added to the annual growth in prices.

In their initial years of investing, Baby Boomers got burned and burned badly. They still remember it.

Are there clouds on the horizon that we should worry about? Unfortunately, yes. We absolutely have to resolve the supply chain issues worldwide and do it fast. If there is a tax increase on top of a broken supply chain, that combination could tip us into stagflation, not a place we want to be.

Resources:

[1] https://www.forbes.com/sites/brendarichardson/2019/07/26/nearly-40-of-homes-in-the-us-are-free-and-clear-of-a-mortgage/?sh=7115b6fd47c2

[2] https://www.officialdata.org/us/stocks/s-p-500/1970

[3] https://www.federalreservehistory.org/essays/great-inflation

[4] http://www.fedprimerate.com/mortgage_rates.htm

Contributing Writer: Subject Matter Expert Charles McCain

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