Whether it will happen depends on worker output, or productivity. If higher wages and benefits result in greater output, that should put no upward pressure on broad inflation measures. There’s evidence that may happen. If work-from-home becomes ingrained, that could lead to a 5% boost in U.S. productivity, Bloomberg News reports citing a study co-authored by researchers at Stanford University, the University of Chicago Booth School of Business and the Instituto Tecnológico Autónomo de México that polled over 30,000 U.S. workers.1 The study found that 20% of full workdays will be from home after the pandemic, compared with just 5% before it began.
The ECI data isn’t as sexy as lumber prices or GameStop’s stock – however, it’s the crux of the inflation question and it will play a prominent role in the Federal Reserve’s future discussions of whether inflation is getting too hot and interest rate hikes are needed.
Goals-Based plans & inflation
For goals-based investors in the Gain and Protect stages, we believe the inflation conversation is largely a distraction. Wages would likely respond to an increase in inflation, and over long periods, stocks have historically outpaced the rising cost of living.
In Horizon’s research on retirement funding shows that even during a “bad” 20-year rolling return period for stocks, inflation-adjusted returns outpace the best periods for a broad bond-market investment.
Inflation risk is a more urgent issue for newly retired people, who face a 20- to 30-year retirement. Today’s low bond yields, we believe, are unlikely to beat the current rate of inflation, and bond returns will be hamstrung if inflation accelerates (see our Q1 Focus report “Crushed by Zero”).
Horizon created its Real Spend® suite of solutions with the goal of mitigating retirement inflation risks better than traditional portfolio construction which calls for more bond exposure as people age.
Our flexible investment strategy – embracing bond alternatives alongside traditional fixed-income – allows us to adapt should the Federal Reserve decide to combat inflation by raising interest rates. In addition, Real Spend® portfolios are designed to tilt to equities because we believe in their long-term, inflation-beating power.
We believe the combination of these components within a single strategy gives retirees the best probability of ensuring people don’t outlive their money. In an environment where inflation risks are higher than they’ve been in years, Horizon’s Real Spend® strategies offer a solution rooted in research, yet practical in application.
1 “Work From Home to Lift Productivity by 5% in Post-Pandemic U.S.,” Bloomberg News, 4/22/21