What Higher Inflation Means to You

Inflation has been front page news the last few months. Normal inflation is okay and necessary for a growing economy. However, rapidly rising inflation is a problem when it starts to raise the price of many items faster than wages increase. And that’s what’s happening now. Inflation is higher than it’s been in over 30 years.

Simply, “inflation” is the rate of price increases for goods and services. According to the website Trading Economics, over the last 100 years, the price of goods and services has increased in the U.S. about 3.24%/year on average. Since 2010, inflation (the rate of price increases) has been about 2.19%/year.
Now the fun part. From September 2020 to October 2021, the annual inflation rate is 6.2% according to the U.S. Labor Department. Ouch.

The Federal Reserve Open Market Committee (FOMC) is the group that sets short term interest rates among banks and is the government watchdog on inflation. The FOMC has acknowledged the higher inflation rates and it are okay with the higher rates, for now anyway. The FOMC also lays most of the blame for higher inflation on supply chain issues arising from the COVID-19 pandemic.
After the latest FOMC meeting in November, Fed chair Powell said, “Inflation has come in higher than expected. Bottlenecks have been more persistent and are on track to persist well into next year.”

Thus, expect inflation to hang around until at least late 2022. However, unlike inflation in the 1980’s, the FOMC does not expect high inflation to be a long-lasting factor. Powell said the current inflation bubble, “…won’t leave behind permanent or persistently higher inflation.”

Because high inflation will be with us for a while, what does this mean for you? A Bankrate.com article highlights the winners and losers with higher inflation. The winners:
• People with fixed-rate mortgages
• Stockholders
• Commodity investors.

And those most hurt by higher inflation:
• Savers
• Retirees
• Long-term bond investors
• Variable-rate mortgage holders
• Credit card borrowers
• First-time homebuyers.

Keeping these points in mind, here are five action items to consider during this period of high inflation:

  1. Make sure your portfolio is well-balanced and meets your risk tolerance, time horizon and goals. Within this guideline, invest in stocks and avoid long-term bonds. Consider a special type of bond called a Treasury Inflation Protect Treasury Security (TIPS). This type of bond (or bond fund or ETF) increases in value as the rate of inflation increases.

2. Unless you need it for short term goals or for your emergency fund, avoid holding cash. If inflation is 6% and your savings account earns less than 1%, you’re losing 5% of purchasing power. Even if savings rates rise, you’re losing purchasing power.

3. If you’re buying a home or refinancing a current mortgage, get a fixed rate.

4. Don’t borrow against your credit card with its variable rate fees.

5. Shore up your overall finances. Higher inflation will have un-knowable consequences on the economy. If inflation persists longer than expected, or if the FOMC takes extreme measures (or simply mis-calculates its response), the economy could go into another recession. This is a good time to make sure you have an adequate emergency fund, are not over-leveraged with debt and your investment portfolio is balanced to your risk tolerance.

Hopefully, high inflation will be a temporary factor in our lives. With a little smart financial planning, you should be able to weather the storm. However, if you would like to speak with one of our fee-only and fiduciary advisers to review your personal finances, please click on the “Schedule Appointment” button on our website.