Enter the era of coflation

How do you describe an emerging economic phenomenon that defies historical models?


Published:

We name things for many reasons, but mostly to give them meaning, context and perspective. Bull and bear markets and periods of recession or extraordinary economic growth never exist in a vacuum or in perpetuity.

The lethal fiscal bout of the “stagflation” era of 1973-1974 and 1978-1980 – when interest rates ballooned, unemployment rose quickly, economic growth flattened and inflation spiked to double-digit levels (partially due to skyrocketing oil prices) – were the last time a new economic trend challenged our ability to properly define it. Historians will likely look back at this post-2009 period as one of coflation. 

A caveat is worthy here because if you haven’t heard of this, you aren’t alone. It is a new concept first mentioned in 2010, and expanded upon in our practice over the past 5 years.

It helps us explain to clients what is happening today at both macro and micro levels. We have talked to our clients about coflation to help them understand the economic paradigms of inflation and deflation that can coexist in a global economy. Falling commodity prices, a record low interest rate policy and stagnating wages are examples of deflation. 

On the inflationary side, we see the rising costs of health care, prescription drugs and education. If you have a child in college or you are a worker who just lost their job in the oil patch, you know that these paradigms co-exist today.

The reason coflation should be acknowledged and better understood can be found in a 21st century dynamic of increased globalization. Some have been surprised by three events that turned out to be far more deflationary than anticipated: the American housing bubble collapse and subsequent recession of 2007-2009; the Eurozone debt crisis beginning in 2011; and the collapse in commodities and China’s markets which became more apparent in 2015. 

These events all occurred in less than a decade. Just as the two oil embargoes of the 1970s acted as massive earthquakes to a burgeoning global economic system, the interconnectedness of the global economy is no small matter today. When developing markets have a deflationary sneeze, emerging markets are more susceptible to inflationary pneumonia – and vice versa.

What does this mean from a financial planning perspective? The industry has developed much better tools than we had three decades ago following the “stagflation” bout. We have had linear regression and Monte Carlo models, but the actual outcomes of these models rarely match the real demands of life. 

Not so long ago, we could imagine a healthy portfolio being nourished by an average 6.7 percent return rate, which was supercharged in the long run by compound interest. Not so today. 

The most important attribute of successful financial planning may be smart life planning. The ultimate impact of coflation, stagflation or other trends we don’t know about depends on where we are in one’s life cycle: 

 • How might you be impacted by coflation and when?

 • What are you doing to prepare for the higher costs for your kids or grandkids if you wish to support their efforts to obtain a higher education?

 • What cash flow and liquidity planning have you done for Medicare premiums that are slated to rise much as 52% in 2016?

 • How can you help adult children and friends with stagnating income levels and increased expenses manage their opportunities and risks? 

Coflation is one of the economic forces that needs to be understood in the larger context of achieving life’s goals. It is better to name the force now and understand its impact and potential consequences than to miss achieving one’s goals by assuming the past is a certain prologue. 

Tom Sedoric, a nationally recognized wealth manager, is managing director-investments at The Sedoric Group of Wells Fargo Advisors in Portsmouth, 603-430-8000 and thesedoricgroup.com. 

More of Tom Sedoric's columns you might like

The price of financial illiteracy

The bill is past due on the choice to ignore earlier generations’ fiscal lessons

Investing in a time of ‘sharing’

While consumers might love the benefits of the ‘sharing economy’ investors and others may not

Who doesn’t want success?

Bull markets and the wealth effect can create opportunities for making very bad decisions

Will the can kick back?

Brewing generational tensions explain the current economic landscape
Edit ModuleShow Tags
Edit ModuleShow Tags