HOW INFLATION IMPACTS US (& HOW TO DEAL WITH IT)

by: Remie Longbrake | published: May 9, 2022

Inflation has risen greatly recently. The causes can be argued to some degree, however that doesn’t help us get away of its impact. So here are some steps that can be implemented to help relieve some of the challenges we face.

What is inflation exactly?
Inflation can be described as a rise in the prices of consumer goods and services. It is generally not specific to a particular good, service or industry, but rather a broader increase overall. Higher inflation can lead to lower purchasing power unless wages outpace this metric, which lately it has not.

Historically in past 20 years, the US inflation has been low, hovering around 1.5% – 4% annually. This is according to Consumer Price Index (CPI), which is compiled by the U.S. Bureau of Labor Statistics (BLS). Inflation can also be tracked through the Producer Price Index (PPI). Is is used to track prices of services and physical goods of domestic producers.

What is causing inflation?

While there is no one cause in particular, much of inflation lately has occurred to Covid-related instabilities. This is primary due to the lock downs and supply-chain challenges felt not only in the US, but around the World. Further, when the Federal Reserve printed trillions in stimulus to help prop up the economy, this in effect put more dollars in the circulation. These dollars printed exceeded the demand of the economy’s growth rate, therefore creating a situation where the money supply outpaced demand, contributing to increased prices.

Should you be worried?

Overall, inflation is a concern. If you believe the data, it’s currently over 8% annually and even higher in some regions and industries. These higher prices, whether at the gas pump, grocery store, department store, take-out, ect, is all putting stress on our wallets. Businesses, who experience higher materials cost, will only pass on these costs to consumers. In the tight labor market, this has helped increase wages for many, however, even though wages may be higher, this in return only drives the goods and services we buy higher as well, and generally wages have not kept up.

My house is worth more, doesn’t that help me?

Unless you’re selling probably not that much. Appreciation of assets do help regulate the impact of inflation. Housing can be one of these attributes, but not always. Of course, the housing market, like many indexes, is not the same everywhere. So if you do sell, you’d need to make sure the next house you buy is more of a deal than what you’re selling for. In many markets this is a tough sale. Sometimes moving to alternative markets and suburbs can help, but many times it’s not, and if you do make a profit, it’s could be to a smaller house, poorer schools, more crime, higher property taxes, ect. In essence higher demand most often equals higher prices.

What about my savings?

Savings is great to do and should be done as part of a balanced and diversified financial plan that is discussed with your spouse and financial professional. Savings is often tossed in with investments, however this isn’t really true. Savings should be considered more liquid, such as cash in your savings account, checking account, and emergency fund. Given that liquidity option, for the most part banks are not going to be able to offer a hedge to outpace inflation. Therefore, the money placed in these accounts are slowly being eroded by the effects of inflation. For instance, if inflation is 8% and your savings account is offering 1% interest, you’re losing money. It is important to keep some money liquid. Emergencies come up, car repairs, medical expenses, child-related expenses. In your investments there is usually some penalty for withdrawing. That penalty could not only be applied by the institution, but also if your pulling money out of an account that is beating inflation, then that is less you have beating inflation.

My about my investments?

Well this is your most likely means to combating inflation. As we discussed, the house you live in probably isn’t going to help you much. Although you could cash out some equity, this is risky and is reliant on appreciating home prices. That concept however can applied to other assets. This could be a rental property. Right now money is relatively cheap to borrow. That leaves the option to buy assets such as real estate. And if the market you invest in continues to appreciate you have increased margins plus your tenant should be the one paying down the loan for you.

Other investments could include your 401(k), IRA’s, stocks, mutual funds, high-yield bonds, gold, silver, Real Estate Investment Trusts (REITs), and Crypto and block-chain related entities. Other alternative is buying a business. Many American business are cash-flow positive with senior-aged principles. That could be an opportunity depending on your risk tolerance and inquisitiveness.

What other steps can I take?

You can consider taking on more work. This could be at your current job or take on part-time work or start a side business. Perhaps asking for raise is an option or maybe a career or job change altogether. In some cases employers are giving bonuses for new hires given the strain to find qualified applicants in some situations. Networking can go a long way as well. This is about providing value to others and trying to solve problems. Volunteering is another way to stand out and a make a difference.

In closing

The main take-away is the inflation is likely not going away soon. It takes creativity, knowledge, desire and effort to stay ahead of inflation. If you don’t, then you’re not getting ahead. The sad reality is many Americans don’t have any investable assets so they are the most impacted. The one’s who do have assets at least have a chance to fight inflation and become more financially successful.

Having a successful financial future starts by knowing where you are financially and having a plan. We have budgeting and net worth resources available to you at no charge upon request.

It is our recommendation to always consult with a licensed and reputable financial expert. This educational article is not specific advice. We strive to present quality, effective content. For specific references to our content please use our contact page.