The Inflation Situation: What Could Be Coming Next
How bad is inflation really?
Well with 6 months of inflation rates above 8%, and the most recent being 8.3%, it’s definitely not good. Now, let’s remind ourselves that inflation is calculated using a year-over-year rate of change. This makes the inflation prints even scarier when you realize that the previous year’s inflation print for August of 2021 was 5.4%. Meaning that the two-year change in prices has been pretty extreme.
For example, let’s take something that cost $100 in May of 2020.
Due to inflation in May of 2021 that same item now cost $105.
Flash forward to May of 2022 now that item costs $114.
Throw in another year of 5%+ inflation and this item could now cost almost $120 - an increase of almost 20% over three years. Now, obviously, this is the inflation rate of all items and not truly reflective of every item in the market, but it illustrates just how quickly this can get out of control.
Now a lot of people have been feeling the pain of inflation and can attest that this has been quite a significant jump. However, it is good news that there have been signs of inflation slowing, and it should continue to thanks in part to 2021’s inflation was at an elevated level already. We are still a long way from the target inflation rate of 2%, which means there will be a lot more pain from an economic standpoint as the fed’s only course of action is to crush demand across all sectors. This will include the need to see unemployment start to rise because a huge part of this inflationary pressure comes from wage inflation, which is a result of there being a shortage of workers, which companies then in turn pass on to the consumer so that they can attempt to keep profits strong.
Expect aggressive rate hikes from the fed and if this inflation continues, a very high possibility of a painful recession.
Are you prepared for this scenario?
This could mean drastic declines in the stock market, job loss, and depressed real estate prices. If you are someone who is employed, right now might be a good opportunity to beef up your emergency fund. A good rule of thumb is 3 - 6 months of expenses saved in a cash account. This can give you the buffer you need to live on while you look for another job.
If you’re retired, now is a good time to set up a 5-year income plan. While the best time to do this was when the market was at all-time highs, it is now necessary more than ever to make sure you have your next 5 years in safer assets, cash for the first year, and bond-like investments that match your specific duration need for years 2 - 5. This will help you not have to sell stocks to fund your living expenses if stocks do continue to fall lower. Allowing you 5 years of security while the economy and markets figure things out and get back on track.
There is a possibility we avoid a terrible recession and the Fed can get inflation under control. We hope this is what happens and that everything can work out great. But we must also be aware that not everything works out like a fairy tale.
If you need to make sure your financial plan is prepared for whatever happens next, get in touch and we can make sure you’re ready.
Will
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.