Your Financial Future: Inflation is inevitable
Inflation continues to be one of the economy蘑菇视频 biggest financial concerns.
Gasoline is at a seven-year high and $1 a gallon more than last year at this time. Grocery prices are rising rapidly, with many items up 10%.
Economists look at inflation in different ways.
Core inflation tracks prices of goods and services. Interestingly, core inflation includes shelter, household furnishings, apparel, transportation, medical care and recreation. Surprisingly it does not include food and energy inflation. When these are included, it becomes the consumer price index. In June, this index rose 5.4% representing the largest 12-month increase in 13 years.
This situation should have been predictable.
During the pandemic many things changed in the economy. There was unprecedented financial stimulus given. People could not go on vacation or eat out, so they purchased home furnishings, exercise equipment, home office supplies and other things. This demand combined with shut downs at Asian factories caused disruptions to the supply chain. Also, because many people received more income than they would from their jobs, savings increased which meant this artificial demand would continue for a while.
This all contributes to inflation.
The FED, like most national banks, likes to see inflation of about 2% a year. At that rate most people looking for jobs can find employment, people can afford to purchase the things they need, and repaying government debt is a little bit less expensive.
Chairman Powell has been saying that he is not concerned because he sees inflation as transitory, or short term. The FED has recently had to admit that inflation may last longer, possibly extending well into 2022.
Historically the FED has watched for signals from the bond market to predict future inflation. Bond buyers want to earn yield or interest in line with expected inflation. Recently five-year rates touched 3% which is known as break even. Wage rates and rental rates are increasing, and these usually are more long-term indicators of what will happen with interest rates.
Lawrence H. Summers, an economist in the Clinton and Biden administration, recently told the New York Times that the stimulus bill signed in March was too much. He said, 鈥�(I)nflation now risks spiraling out of control.鈥�
鈥淭he original sin was an oversized American Rescue Plan. It contributed to both higher output, but also higher prices,鈥� said Jason Furman, a Harvard economist who chaired the White House Council of Economic Advisors under President Barrack Obama. Yet, Washington, D.C. continues to try and spend trillions more.
Next week the FED will discuss what they need to do.
They have hinted there could be a slowdown in their bond purchases. They have been pumping $120 billion into financial markets every month since the pandemic started. This has allowed huge amounts of money to flow into the stock market. What happens when the FED starts to reduce this abnormal and excessive liquidity? Time will tell.
Make sure that your financial plan accounts for all of these upcoming changes. Inflation is going up as are interest rates.
The deficit is growing and there will be big changes in liquidity. Since the recession in 2008-09 we have been living in the perfect environment for stocks. Make sure your allocations match your risk tolerance and time line.
We may have been spoiled by the last decade.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, 鈥淵our Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.鈥� If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.