Side Hustles: The Real Inflation Hedge

By Dr. Daniel Smith, WCI Columnist

I’m going to ask a blunt question. How much has your income risen over the last five years? Was it at least 21%? I’ll tell you that the rents from my rentals and home values certainly have; however, my physician income per patient has most certainly not. I’m asking because that’s how much inflation has risen over the same time period. In fact, if I could go back five years ago, I’d have bought another eight rentals at the outset.

Even with the COVID eviction moratorium, the income from my rentals actually increased slightly more than inflation—about 23%. The best part I haven’t mentioned yet is the principal paydown of another ~9% and the home value increase of nearly 40% over the same time period! Even by leaving out mortgage principal paydown and property value appreciation, my rental income beat inflation, as any investor worth their salt is looking to do.

But let’s contrast that with physician-owner situations. I’d bet that if you own your practice, your staffing costs increased by at least 21%, not to mention prices for consumables, rent, utilities, and other back-office expenditures. If you’re an employed physician, have you noticed your employer or hospital cutting back on spending and scrutinizing costs with an increasingly jaundiced eye? The reason, which we all can guess, is due to inflation. But why should physicians accept lower and lower relative incomes when just about everything else is becoming more costly?

Why Care About Inflation?

Inflation is simply the increase in costs for goods and services over time. However, for the physician, inflation is the carbon monoxide of fixed wages, a slow and seditious denigration of your financial health. It’s one of Bill Bernstein’s big four threats to your wealth: inflation, deflation, devastation, and confiscation.

Confiscation by the government or another entity is uncommon in America because our legislation is predicated upon English Common Law, which holds the ownership of property as a citizen’s right. Devastation is certainly possible for those whose incomes are subject to natural and man-made disasters, like the Dust Bowl of the 1930s which decimated farmers and those upon whom they relied or the financial crisis of 2008 which relied upon the stability of mortgage payments. Deflation in America is also uncommon with the most recent example being the Great Depression where prices dropped 7%-10% per year from 1930-1933.

Inflation in small doses, according to many economists, has a neutral to positive effect on an economy: making exports cheaper to foreign buyers, making debt “cheapen” as time passes (i.e. your one dollar you owe your bank is worth 21 cents less in purchasing power now than five years ago), and encouraging companies to borrow to build new things and create more jobs. Inflation that gets readers’ attention tends to be that of countries in financial stress: Venezuela (at nearly 10,000%!), Zimbabwe, and Iran, for example.

High inflation erodes purchasing power and, thus, public confidence that tomorrow’s needs might not be met with tomorrow’s dollars. Panic-buying ensues, which pushes inflation higher. Fortunately, we don’t have runaway inflation thanks to the Federal Reserve mandate of low, stable inflation (monetary policy like raising interest rates or the sale of securities on its balance sheet) and a previous history of good financial policy and prudence on the legislative side. Then, why the concern with our low to moderate inflation?

It’s because . . .

Physician incomes lag inflation . . . considerably.

The 21% figure I quoted above came from the Consumer Price Index (CPI), as measured from February 2021-February 2023. The federal government measures the CPI to help it determine what the inflation rate is and has been. The CPI guides our central bank’s decisions about monetary policy (federal discount rate, bond purchasing, and reserve requirements) and our legislators regarding fiscal policy (tax and spend; i.e. the budget). The CPI also drives inflation-adjusted rates on Social Security benefits, federal workers’ pay, and elective deferral limits for qualified retirement plans. Conspicuously absent from the list of inflation-adjusted federal expenditures is Medicare pay rates for physicians.

Inflation concerns are not new, however. In 2021, the AMA released this graph of the CPI compared against pay increases for acute-care hospitals, skilled nursing facilities, and outpatient hospitals. Trundling along at the bottom is physician pay—which, from 2001-2021, increased a marginal 10.5% while the CPI increased 50%. This means that over the course of that 20-year span, physician incomes dropped by 39.5% in after-inflation dollars. Further, the cost of…