Your Financial Future: Take inflation seriously
There are very important FED meetings on Sept. 20 and 21.
They have been very clear that they take inflation seriously and they will do whatever is necessary to deal with it. The stock market probably has gotten ahead of itself. Wall Street firms have been trying to convince themselves and even more importantly, investors that inflation was getting under control, and everything is going to be fine soon. It is important to understand that both inflation and rising interest rates are having a negative impact on stock values.
It is easy to see that gasoline prices have been coming down for weeks, but this does not mean that all prices are going back to where they were last year. Gas prices are very volatile. They go up and down all of the time. Gas is a commodity. Oil companies can increase supply by pumping more out of the ground. People may travel less for one reason or another, and this changes the demand which can affect prices. Just seeing gas at a lower cost is great, but it is a small part of our inflation dilemma.
Economists and other strategists are always trying to predict future economic trends. Many had hoped the trend was changing. When the actual figures were released this Tuesday, they were higher than expected. While there was a slight reduction, it was not nearly as much as some hoped for. It was still 8.3% higher than last year. Food prices, which most people spend more on than gasoline is up over 13%. Credit card interest rates are now over 21% and holiday airfares this year will be the highest in five years.
Many elements of inflation such as rising wages will never go back to what they were last year. These are fixed costs which businesses must build into their prices. While wages have been rising, they are not fully keeping up with the inflation rate. It is important to remember that inflation is a loss of purchasing power. It hurts everyone, but is especially painful for lower income people. This is because they do not have as many options about how to deal with it. They may have to prioritize spending, and reduce or do without some items. The average household is now paying about $460 more every month in extra expenses
We are hearing some information out of Washington, D.C., that the recently passed anti-inflation bill is going to help. This law will do very little in the short term as it phases in over some time. Also, many of the discussed points shift some of the cost from one group to another which has minimal impact on overall inflation. Cash flow may be better for some since they get lower bills. But, if the cost is subsidized by others paying more taxes or some other shift, are prices really not still going up?
The country蘑菇视频 leaders have been a big part of the problem. The last stimulus bill, while politically beneficial, was an early start to increased inflation. Bills such as the infrastructure legislation are usually passed when the economy is in a recession 鈥� not overheating. What happens when billions of dollars and a labor shortage are stressed by all of the increased spending?
This past Tuesday, the DOW tumbled 1,250 points. This was the biggest one day drop since 2020, and hurt many 401k balances. We had just experienced four days of a rising market. A relief rally like this is not uncommon in situations like this. No one knows if we have reached the market bottom or how long it will take to recover all of the losses.
The FED is going to raise rates next week, probably three-quarters of a point. They will have to consider being more aggressive and going up a full point to deal with this crisis. Remember, the FED actions are all intended to slow inflation.
This means higher cost will most likely be reduced company profits. This will hurt stock values. Also, as interest rates go up, bond values go down. Make sure your portfolio matches these new economic realities.
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.