Camelot Portfolios Talking Points

Eclipsing Inflation

On Monday, the continental United States witnessed its first solar eclipse from coast-to-coast in 99 years. In this time span prices, items, and ideas changed all over the world. The Great War was coming to an end, prohibition was just around the corner, and Coca-Cola cost only a nickel (Kestenbaum). Today, most of the developed world does not offer Coke in a bottle for 5 cents. Since inflation seems to seep into pricing over time, developed countries tend to have a better grasp on long term inflation compared to developing countries.

As the Federal Reserve worries about core inflation breaching 2 percent, many South American countries struggle keeping inflation below 10 percent. One of the countries in the headlines is Venezuela with reported inflation at 741 percent (Trading Economics). The other major country in South America with high reported inflation rates are Argentina with 21.9 percent (Trading Economics). Brazil has significantly changed over the past year, and has decreased inflation from above 10 percent in December 2016 to 2.71 percent in July 2017 (Trading Economics).

Map of Inflation Rates, Dec 2016. Source: Knoema.com

Map of Inflation Rates, Dec 2016. Source: Knoema.com

So how much does high inflation effect a country? If you take the reported 741 percent inflation in Venezuela, a loaf of bread costing one dollar at the start of the month will compound in cost to $1.64 in 3 months, $2.72 in 6 months and $4.49 in 9 months. Another way of looking at this is add 2.03 cents each day to the price to the $1 loaf of bread in the first year then add 13.01 cents per day in the second year. By year three, that same loaf of bread will cost $406.

Historically speaking, Venezuela is not the record keeper highest inflation. Over the past 100 years, the most famous example was Germany during the Weimar Republic in the 1920’s (To the Tick). Inflation in Germany at this time was 29,500 percent, which equates to prices doubling every 3.7 days (To the Tick). The most recent example of hyperinflation was Zimbabwe in 2008 with an inflation rate that doubled the currency prices every 24.7 hours (To the Tick).

Tracking back to the United States, inflation rates have stayed within a bounded range over the past century. Currently, the reported inflation rate was 1.7 percent in July 2017 (Trading Economics). The main contributors to rising prices were energy and medical care (Trading Economics). Apparel and automotive prices continue to fall (Trading Economics). In all likelihood, the Coke purchased in 1918 for a nickel is close to the inflation adjusted price for a Coke today.

Compiled by the Camelot Portfolios Investment Committee

Darren Munn, CFA, Chief Investment Officer

Eric Kartman, Research

Drew Steinman, CPA, Trader/Research

Zach Hartenburg, Analyst

Frank Echelmeyer, MBA, CKA®, Advisor Consultant

-for Broker/Dealer and RIA use only-

References

Kestenbaum, David. Why Coke Cost a Nickel for 70 Years. 2012.

To the Tick. Hyperinflation – 10 Worst Cases. May 2013. 2017.

Trading Economics. Inflation Rates. 2017. 2017.

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