Have you heard the news? If not, inflation is here, there, and everywhere! Those unfamiliar with inflation will recognize it as the ever-increasing prices on products and services we pay for as consumers. From staples like laundry detergent to escapes like plane tickets, be prepared to pay more when inflation kicks into drive from neutral!
Traditionally, inflation in the United States has averaged around 3.1% a year since 1913. However, the past decade has seen historically low inflation of under 2%. While this has benefited consumers with slowdowns in rising costs, the Federal Reserve wants this to increase to their shiny target of 2%. Unbehest to everyone, inflation seems to have skyrocketed since Pandemic Plummet's recovery, with an eye-watering 5.4% increase in the Consumer Price Index since June of last year.
Now, before diving into what you should do to protect your hard-earned dollars from stagnating and losing their value over time, we need to explain why inflation is necessary.
Benefits of Inflation
Inflation is inherently good for the economy, to a certain degree, as it encourages higher employment rates for potential workers. When inflation is prevalent, consumers are encouraged to buy things now rather than deferring purchases until later. As a result, demand increases in the private sector for employees, which provides income to a more significant portion of the population. Thus, a self-repeating cycle is born and helps grow the economy year over year.
The benefits of inflation allow for moderate interest rates, which helps both savers and the Federal Reserve. While the gains for savers are apparent, the use for the Federal Reserve is more opaque. See, when interest rates are higher, it allows the Federal Reserve to have an increased safety net when market downturns occur, as they can then cut interest rates to stimulate greater demand. When interest rates are lowered, businesses and consumers borrower more to increase purchasing, which increases the need for workers and restores economic order to a faltering economy.
Negatives of Inflation
However, inflation has its own set of downsides, primarily increased costs and the resulting hardships on lower-income families. If inflation stays at the Federal Reserve's target of 2% annually, consumers can expect prices to double every thirty-six years; this is a modest sacrifice to ensure a high level of employment. When inflation runs high, though, it erodes worker spending power, amongst other adverse effects, and can even lead to hyperinflation if not adequately addressed, which can be catastrophic for an economy.
Four things you can do
The biggest takeaway of inflation is that it stimulates increased employment at the cost of diminishing money's intrinsic value. Thus, keeping cash in your pillowcase is ill-advised, as you are sleeping away its value and likely to get a kink in your neck.
So, if you are like anyone else, you must invest! Now investing doesn't only mean stocks; rather, it includes the entire world of investable assets. From stocks to bonds, annuities to options, plenty of investments exist.
Second, don't just invest: Diversify! Owning physical real estate, purchasing art or collectibles, and even cryptocurrency is a way to spread yourself into various assets to not depend upon one segment of the economy.
Third, ask for a raise! You are worth the labor you put in and if you cannot get a raise, find a new job! The 2020s are being dubbed the decade of the employee as we see an exodus during the Great Resignation.
Lastly, change up your spending patterns! While some purchases will always be essentials, others are, well, discretionary. Consider mixing up your spending habits on optional purchases by finding alternatives where you can; this is a surefire way to shave inflation creep off your budget.
Now is the time
Thus remember, inflation is here to stay, and while higher than it historically has been, there are plenty of ways to protect yourself. Now is a great time to review your portfolio if you haven't in some time to ensure you are prepared for the predicted bout of increased inflation. If you are unsure where to start, we would love to meet with you and review your financial plan!