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The Upside of High Inflation

There aren’t many folks singing the praises of inflation these days – and for good reason. Gasoline and grocery prices are up meaningfully year on year, a tremendous financial burden for most Americans, particularly those making a lower wage; operating costs have jumped for most publicly traded companies, a real headwind for earnings growth, and the stock market has been biased lower as investors worry the Federal Reserve’s efforts to bring inflation under control will also lead to a recession.

We acknowledge that persistent, historically high inflation is responsible for all these difficulties, and we prefer a much lower rate of inflation for goods and services and are hopeful we will see price gains for both moderate as we move through the back half of 2022. That written, there is at least one substantial benefit that high inflation provides, and that is its impact on a country’s debt burden. As we know, we live in a nominal world when it comes to the economy (a company’s sales and a nation’s GDP reflect both volume and pricing, e.g., if a company makes and sells one widget for $5 one year and one widget for $10 the next year, sales have doubled even though volume is flat because prices are up 100% – the same dynamic holds true for an economy overall).

But while inflation pushes GDP higher, the amount of debt taken on by a country remains static. If the US economy has a debt to GDP ratio of 100% and our economy grows by 100% — even if it is only a result of inflation – our debt to GDP ratio drops to 50%, and a nation’s debt to GDP ratio is among the datapoints most used by investors to discern a country’s ability to manage its debt burden. Not surprisingly, we have seen a dramatic drop in our debt to GDP ratio as the economy has reopened and inflation has taken off, from 136% in mid-2020 to 123% as of year-end 2021 (see chart). And that ratio will move lower still, considering nominal US GDP grew mid-single digits in the first quarter of 2022.

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The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital Investments, LLC, a registered investment advisor. 0804-BCI-5/10/2022

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