More Thoughts About Inflation

In earlier posts, I discussed ten upsides of inflation and inflation-fighting strategies. Inflation continues to be in the news so below are some additional insights that I shared recently at a class about inflation-fighting strategies for older adults.

UPH is Real- Many people are feeling the effects of “unexpected price hikes” (UPH), a term coined in a T-Mobile ad. In informal polls of my students, LinkedIn connections, and Facebook friends, higher expenses that stood out to them were food (e.g., $5+ for 12 eggs!), services (e.g., lawn care, tax preparer, hair dresser), natural gas for home heating, electricity, and auto and homeowners insurance.

CPI Calculation- The consumer price index (CPI) that measures inflation is annualized over 12 months (e.g., January 2022 to January 2023) so there is no need for seasonal adjustments. A disadvantage of doing this, however, is that it emphasizes recent history rather than current events when there are abrupt changes. Right now, the CPI is averaging a higher past rate with a lower current rate. In 2021, it was the reverse (i.e., a lower past rate with a higher current rate).

The Rule of 72- For planning purposes, use The Rule of 72 to calculate how quickly prices, as well as investment account balances, will double. Simply divide 72 by an inflation rate to determine the number of years to double the price of an item. For example, at 6% inflation, prices will double every 12 years so a $40,000 new car now would cost approximately $80,000 in 2035. Good news: the historical inflation rate from 1926- 2021 has been only 2.9%.

Personal Inflation Rate- The official government CPI rate announced each month is not the same as people’s personal inflation rate which varies according to age, income, health status, and other variables. For example, young adults may spend more than older adults on gas (commuting to work) and housing (mortgage payments) while older adults might spend more on health care and travel and own a home that is mortgage-free. Personal CPI matters the most.

Impacts by Income Category- Inflation typically impacts lower earners the most because high prices consume a larger share of limited incomes. Recent data suggest, however, that middle-income earners were hit the hardest by inflation. Low-income households received government payments and large wage increases and high-income households had sufficient income and assets to absorb price hikes. Middle-income earners lost the most purchasing power.

Investment Impacts- Investors are understandably concerned about recent persistent inflation and poor market performance resulting in lower balances in retirement savings plans. Younger investors can take advantage of market downturns to buy stocks “on sale.” Retired investors who have enough money to pay living expenses from guaranteed income sources (e.g., pensions, Social Security, annuities) can “ride it out.” Retirees living off invested assets may want to cut expenses, reduce cash withdrawals, or tap cash assets to avoid selling stocks now.

Cash Asset Options- One of the positive outcomes from inflation is increased yields on cash assets resulting from seven rounds of Federal Reserve interest rate increases in 2022. With the Fed Funds Rate over 4%, there is no need to earn less than 1% on savings. Options to consider include Series I bonds (6.89% return through 4/30/23), fixed annuities, brokered CDs, U.S. Treasury bills, and online bank savings and money market accounts.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.