Why Inflation Matters
Many people don't understand what inflation is. To most, it's an irrelevant, long-forgotten subject from some random high school lecture, like calculating the acceleration of a falling object: unless you need to know about it for a living, it really doesn’t matter. Or so the thinking goes.
It matters. We’ve lived for 20+ years – at least – since inflation was a problem. (The reality may be closer to 40 years.) Here’s a quick review of what inflation is, how it affects normal people, and how to adjust your finances accordingly.
Remember how gas was under $1 as recently as a couple of years ago? Now it is $3 to $4 a gallon – even more, in some areas. How about eggs? Also under $1 a dozen, very recently; now, $2 to $3 a dozen. The government measures inflation by selecting a number of specific items and measuring their price changes. Think of it like a more scientific way of buying the same items at the store every month and watching closely how much more or less you pay.
On average, across the nation, our bills have increased nearly 7% over the last year. Ten years ago, inflation was “too low.” The government was trying to get inflation up in the 2%–2.25% range. Some inflation spurs on economic activity, and the PhDs think that the right amount is about 2%. However, due to supply-chain crunches, labor shortages, and people deferring buying things during the height of the pandemic and now trying to “catch up,” there isn’t enough “stuff” to go around.
Gas, milk, eggs, cars, lumber, houses, and especially semiconductors, which are inputs in, well, a lot of things, but especially new vehicles: All backed up, all more expensive than they used to be. Also, wages have started going up. That will also create more demand for products, which will also drive up their prices. (Set aside social considerations about wage increases for this article; there are others who have written on that angle, so we are only examining the economic impact, not assessing whether it is good or bad for society.)
The Ukraine-Russia conflict is likely to further escalate inflation in the near term. However, it’s just another ingredient in the current inflation pie.
So, what can you do as an individual? Hopefully you’ve already done some of it. Consider investments in commodities, specifically ones that might be affected by Russian aggression. Certain metals (i.e., nickel) are heavily produced by both Russia and Ukraine. Floating-rate fixed-income investments rise along with current rates. Foreign bonds can also behave differently than domestic bonds. Finally, though the stock market is volatile, equity investments have historically been a much better hedge against inflation than more docile fixed income investments.
As always, please reach out to our Wealth Management team to speak with a qualified professional who will consider your individual situation.