A while back, I wrote a blog about inflation. It was supposed to be a “feel good” blog about why a moderate amount of inflation is a healthy thing, because it shows economic growth. I also explained why the government wants a little bit of inflation, and the things they might do to encourage it to happen.
However, I am sure you have noticed recently that inflation is a bit higher than normal. Why is it happening? Is it good, bad… dangerous? How do you protect yourself?
I am not a trained economist, but I am never short on opinions! I will address my thoughts on all of these questions.
What is inflation currently?
The Fed is targeting a 2% long term core inflation rate. Lately, we are looking at around 4.5%. Since we have had low inflation for so long, we might need to stay above 2% for a while to get to that average.
Inflation has not been even across all industries though. The chart below shows what I am talking about. Vehicles and core goods are up – way up, but other areas are moderate.
Why is it happening?
This one seems like a no brainer.
The government pumped A LOT of stimulus into the economy. About $6 trillion to be exact. As you know, some of this stimulus went directly into the hands of consumers who are all going out and buying. Retail sales are up – way up! With supply chain issues remaining due to COVID and low employment, there are a lot of dollars chasing a limited supply of goods. That is a recipe for inflation.
Not only that, but The Fed has not backed off from stimulating the bond market (aka quantitative easing). Read more about this in my former inflation post HERE.
So, WHY inflation is happening seems clear. It’s a pretty simple recipe.
Is it good, bad, dangerous?
Yes, yes, and yes.
Inflation is good because it is a sign of economic growth. You can read more on that in my prior blog linked above. Is it bad? Sometimes. It’s bad if wages aren’t keeping up. It’s bad when it creates supply chain issues. Is it dangerous? For some people. You will find that more people are afraid of outliving their money than they are afraid of death itself. When not prepared, high inflation will surely make outliving their money a dangerous reality.
How do I protect myself from inflation?
Inflation will mostly hurt the people who are spending down a portfolio that isn’t keeping up with inflation. I’m not going to recreate the wheel or share a grand secret. The best way to protect your future is investing in a diversified portfolio positioned with the purpose of beating inflation. If you’re not sure how your portfolio looks against inflation, make an appointment with your advisor and ask her your questions. I know she’d love to ease your mind!
For current workers, it is important to ensure that your wages are keeping up with inflation as well. This might require extra training, wage negotiating, or putting forth some extra oomph to ensure you are receiving your highest potential pay.
Higher inflation is here. The Fed has yet to use any of the tools it has to try to slow it down, so with one adjustment of interest rates it could change. We truly have to wait to see. In the meantime, don’t panic, try to avoid used cars, and stick to your long-term investment strategy. Remember, this “higher” inflation is high compared to recent memory, but it’s something we have fared before.