The Ripple Effect

Natural Gas price increases will help fuel inflation.

Sadly, most of the people who live in the United States have very little understanding of the ripple effects of inflation. I think most people probably understand that the price of gasoline at the pump has gone up, as has the price of eggs and meat in the grocery stores. But sometimes the problem is much worse than the average person understands.

Understanding inflation is very important if you live a long time and are saving for retirement. The traditional logic of buying Target Date mutual funds and using bonds and bond funds to play it safe, is a recipe for disaster down the road. The reason is that inflation is not only a hungry beast, but it also has ripple effects. Take, for example, the price of natural gas. Most people use natural gas in the home for cooking or heating their home. But even if they don’t, they are still likely to be natural gas consumers.

Natural Gas Prices and Inflation

Natural Gas and Electricity

Natural Gas Prices – REUTERS article on Fidelity.com

If you look at the price of natural gas increases in Europe, you should be amazed. But you should also be amazed by the increase in the price of natural gas in the USA. Here is why you should be both amazed and perhaps alarmed. Natural gas is used to produce over 40% of the electricity generated in the USA. Therefore, the utilities using natural gas to produce electricity will have higher costs. It is highly likely that they will be raising the prices charged consumers for both natural gas and electricity.

Percent of electricity generated by natural gas in the USA.

Electric Cars, Buses, Firetrucks, and Forklifts

While there is a rush to get us off of fossil fuels, this rush might just compound the cost problems and increase the rate of inflation even more. If more and more people convert to electric-powered transportation, then there will be even greater demand for electricity. Supply that can’t keep pace with demand will result in higher prices.

Some Suggestions for Fighting Inflation

Do not get comfortable with bonds or cash as a long-term safe way to invest. I highly recommend that every investor consider investments that have a high probability of increasing dividends based on a rational dividend payout ratio. That is why ETFs like VYM, SCHD, DGRO, and DVY are worth considering.

Full Disclosure

Cindie and I own shares of various energy-related investments, including VLO, OXY, EOG, PBR, and TRP. We do not own shares in utilities unless they are in an ETF we already own.