By Brandon Miller, CFP–
Nothing says we’re back from pandemic isolation quite like … bounce houses. Given how the contagion spreads, it’s not surprising that families avoided jumping in enclosed spaces like, well, the plague. But the other day, my neighbor’s yard suddenly filled with a lovely pink-and-purple princess castle. And it dawned on me that the bounce house business owner probably sees inflation as a good thing.
That’s a view shared by U.S. Treasury Secretary Janet Yellen. She thinks that a little bit of inflation—the kind where prices go up so your money buys less—might be just what we need right now. But why is it better to pay $10.30 cents tomorrow for the 12-pack that only cost you $10 today?
Prevailing wisdom says that moderate inflation is needed to drive consumption, which is the driving force behind economic growth. Prices rise steadily to avoid stalling or shrinking an economy. In theory, higher prices allow employers to pay higher wages, though that extra profit too often seems to get sucked up when it should trickle down. Prices that rise over time also keep consumers from delaying purchases to wait for lower prices. Without the constant consumption of goods and services, production would shrink, layoffs would become rampant, and the economy would fall into a deep slump.
With that as the alternative, paying a little extra for what we want and need seems to be the better option.
Secretary Yellen thinks inflation will stay around 3% for the rest of this year, a percentage point higher than what the Feds aim for annually. Politicians say this is proof of a reviving economy—or an overheated one—depending on which side of the aisle they caucus with.
Year-over-year comparisons are skewed by the pandemic. By that measure, gas and airfare costs have gone through the roof—up 56% and 24% respectively—but mostly because nobody was leaving their homes last year. On the other hand, food prices averaged 1% higher between May 2020 and May 2021, according to the U.S. Bureau of Labor Statistics.
Secretary Yellen believes the higher numbers are due to “transitory factors.” What she’s referring to here is basic supply and demand. As we re-emerge into life, there is pent-up demand for goods and services. Manufacturers haven’t quite caught up, leading to temporary shortages. High demand coupled with low supply results in higher prices. Once factories and supply chains get up to speed, prices should drop as supply meets demand. The big question is, how long will that take?
Regardless of the cause or duration, the following suggestions may help you stay ahead of inflation in your financial life.
Borrow now. Debtors win with rising inflation because they’re paying off loans with money that is less valuable than when they borrowed. With rates at lows that may not hold for much longer, maybe now is the time to buy a home or boat or whatever you dreamed of during the pandemic.
Lock in long-term arrangements. Today’s rent or mortgage payment may seem a mere pittance if rates climb steadily, so securing a multi-year lease or 30-year mortgage could make sense.
Cash in rewards points. These will be worth much less when prices are higher, so stop hoarding them. Plus, the credit card, airline, etc. issuing the points can change their terms at any time, so enjoy your rewards now while they’ll still buy you something.
Factor inflation into your financial planning. Let’s say you’ll need $10k a month during retirement based on today’s dollars. Over the years, inflation will diminish the amount that $10k can buy. In your later years, you may need $12k to keep pace. Planning for inflation can better prepare you for what’s ahead.
Consider longevity annuities. This supplemental retirement investment has you deposit a large chunk of money into an account with the agreement that you’ll get a guaranteed income stream for life. Unlike regular annuities, these don’t start paying out until you reach age 80+ to help keep you from outliving your savings.
With some foresight and planning, inflation doesn’t have to be something to dread. In fact, as the kids bouncing around in my neighbor’s yard found out, it can help them get the party started. Perhaps a bit of financial inflation will help pump up the economy and wages in the coming months, giving us all something to jump around about.
Brio does not provide tax or legal advice, and nothing contained in these materials should be taken as such. The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.
Brio Financial Group is a registered investment adviser. SEC Registration does not constitute an endorsement of Brio by the SEC nor does it indicate that Brio has attained a particular level of skill or ability. Advisory services are only offered to clients or prospective clients where Brio Financial Group and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Brio Financial Group unless a client service agreement is in place.
Brandon Miller, CFP®, is a financial consultant at Brio Financial Group in San Francisco, specializing in helping LGBT individuals and families plan and achieve their financial goals.
Published on July 15, 2021
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