The Consumer Price Index (CPI) hit a 39 year high with inflation hitting 6.8% year-over-year as of the end of November. With price increases at this level, it is not surprising that the term “inflation” is one of the most searched terms among AT&T employees receiving a lump sum, as well as the general public.  It is so widely searched that the search for “inflation” on media research site Factiva shows more hits in October than during any month in the past decade.

The most common indicator of inflation is the CPI. The CPI essentially measures the change in prices paid by urban customers for the same basket of goods over time. The CPI’s current 39 year high and the Federal Reserve’s standard 2% inflation rate show that the United States is in a time of rising inflation. The impact of inflation is not necessarily seen immediately. As Milton Friedman said, inflation is similar to a hangover, in that “the good effects come first and the bad effects only come later.” So how should people prepare for the future with higher inflation?

How Inflation Affects AT&T Pension Lump Sums

As inflation rises, interest rates typically rise as well. Rising interest rates impact the economy, housing market, stock market, and the value of the AT&T employees’ pension lump sums.

When inflation increases, generally bond yields increase.  When the corporate bond index used to calculate AT&T lump sums rise, it causes the AT&T pension lump sums to fall (higher rates lower lump sums). A 1% increase in the lump sum could cause the AT&T lump sums to drop anywhere from 8% to 12%   This has caused many AT&T retirees to time their retirement when interest rates are lower and lump sums are higher. The Retirement Group offers webinars for AT&T employees on timing interest rates for retirement. 

Why Value Investing Beats Inflation

When interest rates rise, it also causes stocks of expensive companies’ price-to-earnings (P/E) multiples to compress. The companies most negatively affected are generally high-tech companies, companies with very little earnings, and those companies who will be receiving most of the earnings many years in the future. The P/E ratio of these expensive stocks has doubled since 2009, while the multiple of value stocks is roughly unchanged.  The Retirement Group found that during higher inflation and rising rates, value held up better and long-term corporate profitability remained steady. Investors concerned about inflation should focus on fair and low valuation in the value sector.

The Retirement Group does not try to forecast the many moving parts of inflationary pressures from a macro perspective, but rather they look at the impact of a multitude of issues, including inflation, on a company-by-company basis. To provide some context to the inflation discussion, The Retirement Group reviewed research on how value stocks performed during various inflationary environments such as the 1967 to 1980 time frame.

In short, The Retirement Group found:

• Value performed better than the S&P index during periods of higher inflation.

• Value remains the best alternative in equity and fixed income markets today that offers a double-digit earnings yield.

• Commoditized businesses are affected more as higher input costs cannot be passed through to the consumer, if a commoditized business raises prices, then customers simply buy an identical good or service from a lower-priced competitor. The expected result is either lower sales, lower margins, or both. In contrast, differentiated products or value-added services are not as readily substitutable.

• Advantaged businesses selling differentiated products or value-added services can often raise prices if needed and are more protected from inflation. 

Get a Retirekit

The rise in rates makes an employee’s retirement date, retirement planning, and investment allocation more important during an inflationary cycle.   Value doesn’t need inflation to work, but, should inflation pressures persist, historically a higher inflationary regime appears to be a tailwind. Although no one can not predict interest rates, it is important for an employee to prepare for their retirement date. The Retirement Group offers an opportunity to retire on purpose, with purpose, and get a Retirekit cash flow projection to better understand the available options in an inflationary cycle.

Disclosure:

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, access.att.com, or AT&T. The Retirement Group is an independent financial advisory group that focuses on transition planning and lump sum distribution. Neither The Retirement Group or FSC Securities provide tax or legal advice. Please call the office at 800-900-5867 for additional questions or for help in the retirement planning process. The Retirement Group is not affiliated with NetBenefits. The Retirement Group is not affiliated with att.com benefits. 

Securities offered through FSC Securities Corporation (FSC) member FINRA/SIPC. Investment advisory services offered through The Retirement Group, LLC. FSC is separately owned and other entities and/or marketing names, products or services referenced here are independent of FSC. Office of Supervisory Jurisdiction: 5414 Oberlin Dr #220, San Diego CA 92121. AT&T is not affiliated nor endorsed by The Retirement Group or FSC Securities.

Sources

• https://www.heartlandadvisors.com/Insights/Market-Insights/What-if-Inflation-is-Here-to-Stay

• https://www.wsj.com/articles/us-inflation-consumer-price-index-november-2021-11639088867?mod=djemalertNEWS

• https://www.horizoninvestments.com/booming-u-s-helps-snuff-out-feds-transitory-view-of-inflation/

• https://www.wsj.com/articles/powell-warns-omicron-variant-could-worsen-inflation-boosting-bottlenecks-11638280800#:~:text=Federal%20Reserve%20Chairman%20Jerome%20Powell%20said%20the%20central%20bank%20was,could%20exacerbate%20supply%2Dchain%20disruptions.

• https://www.institutionalinvestor.com/article/b1qzbpv70109zm/Inflation-Is-Coming-And-Active-Funds-Aren-t-Prepared-Bank-of-America-Warns

• https://www.cnbc.com/2021/09/07/investors-can-fight-inflation-fears-with-knowledge-and-perspective.html

• https://www.gmo.com/americas/research-library/quality-investing-and-inflation/

• https://www.gmo.com/americas/research-library/part-2-what-to-do-in-the-case-of-sustained-inflation/

• https://fortune.com/2021/10/14/value-stocks-outlook-investing-what-stocks-to-buy-radmfent-vtv-dflvx/

• https://blogs.cfainstitute.org/investor/2021/07/19/myth-busting-equities-are-an-inflation-hedge/

• https://money.usnews.com/investing/portfolio-management/articles/why-value-investing-should-be-part-of-your-portfolio

• https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/us-inflation-pressure-gives-value-stocks-another-edge-over-growth-stocks-64504475

• https://www.kiplinger.com/investing/603051/hey-investors-dont-panic-about-inflation-do-this-instead

• https://www.wsj.com/articles/u-s-companies-bet-shoppers-will-keep-paying-higher-prices-11635067802?mod=article_inline

• https://www.wsj.com/articles/broader-inflation-pressures-begin-to-show-11633339800?mod=article_inline

• https://www.wsj.com/articles/value-investors-finally-have-reason-to-celebratefor-now-11615545000?mod=article_inline

• https://www.wsj.com/articles/inflation-could-mean-value-stocks-time-to-shine-11635270687

• Federal Reserve Bank of St. Louis,

• Sanford C. Bernstein & Co

• https://www.pzena.com/staying-the-course-inflation-and-value-investing/

• https://www.seeitmarket.com/heres-whats-wrong-with-the-bls-housing-inflation-measure/

• https://investornews.vanguard/the-potency-of-commodities-as-an-inflation-hedge/

• https://www.milliman.com/en/insight/why-inflation-has-limited-impact-on-healthcare-trends

• U.S. Bureau of Labor Statistics

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