Inflation Nation: The Silent Killer

It is difficult lately to turn on the TV or read a news article lately without hearing the word “inflation.” It has been many years since this term has gained any significant attention. But, what is “inflation”? Quite simply, it is the uptick in cost of goods and services over time. As prices rise for gas, groceries, cars, homes, and other necessities, the value of the dollar falls, resulting in a loss of purchasing power.

Since 2000, this number has averaged around 2%. In 2009, we actually saw a decrease! According to the U. S. Bureau of Labor Statistics, that rate crept to 3% in April, then 4%, and has not fallen since. So, why is this happening, how does it affect your savings strategy, is it here to stay, and what can you do, if anything, to keep up? Read on to find out!

Inflation Rising

Inflation is actually a very natural occurrence and healthy for the economy. It is closely related to supply and demand. As supply diminishes and demand rises, prices go up. The Federal Reserve also has a very strong influence through its regulation of interest rates and the money supply. When they keep interest rates low, the cost to borrow decreases, encouraging spending. Also, because of the COVID-19 pandemic, the money supply has increased significantly in order to combat a complete meltdown of the economy. So, you have a perfect storm of low interest rates and a lot of money floating around, which means higher consumer demand. The problem? Since economies have reopened, businesses are playing catch up and there isn’t enough supply to meet the demand.

Invest or Stay on the Sidelines?

You may find this surprising, but in our low interest rate environment (think the 0.4% interest rate on your savings account - if you’re lucky!), the stock market historically tends to do better during inflationary periods. Let’s face it, almost anything is better than 0.4% and the stock market has a better chance of beating it than your local bank*. Check this out: if your savings account is earning 0.4% and inflation is running at 4.0%, you are in a sense “losing money”, effectively earning a measly -3.6%. This by no means is an indication that you should ditch your savings account. My point here is to not sell your investments and go to cash because you think you are "safer". The biggest sufferers of low interest rates are those living on a high amount of savings, such as retirees. If you are young and in the accumulation stage, continuing to invest is important. Do not concern yourself with things you cannot control such as economics, politics, and stock market movements. Stick to your guns and allow your goals to guide your decisions, not who is President or head of the Federal Reserve.

What Can You Do?

Honestly, not a whole lot. The problem with inflation is that it affects the cost of necessities such as food, transportation, and housing. Perhaps, holding off on buying a home or renting in an expensive area is an option. Many employers are still encouraging remote work, which also lessens trips to the gas station. You can also consolidate trips or stay in for game night rather than taking a road trip. You may also want to start stocking up when store items are on sale rather than making a last-minute dash to get groceries once the refrigerator is empty. And finally, when was the last time you asked for a raise, looked for a higher paying job, or even thought about starting a side gig? Now, might be the time.

Will This Last Forever?

Many economists and experts are saying no. Most recently, the Organisation for Economic Co-operation and Development has predicated that we could continue to see inflation running higher over the next two years. Will it return to the runaway inflation we saw in the 70’s and 80’s, otherwise known as the Great Inflation, when interest rates were as high as 20% and inflation was in the double digits? Again, experts are saying no. Mainly because the circumstances were different. But, hold tight for now because the ride isn’t over yet.

In Summary, prices are rising more than what we’ve seen over the past 20 years, but we are in no way in another Great Inflation. While we do not have control over what is happening, it is a natural economic occurrence. There are a few things you can do to combat inflation in your household and that includes staying invested and not going to cash, which effectively is earning a negative return. Have a plan and stay the course!

*Disclaimer: This blog is for educational purposes only and should not be construed as advice. All investments carry some form of risk and past performance is no guarantee of future results. A financial advisor can help you develop a plan tailored to your specific situation.