What the heck is going on with inflation? Here’s what you need to know

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Last month, the US consumer price index, a survey of a variety of goods, rose 5% year over year. The increase was slightly higher than expected and the largest increase since summer 2008, according to the Ministry of Labor.

That makes Wall Street buzz about what inflation does to markets and the economy. But what does that mean for normal people? Usually higher prices.

But first, it is important to understand what inflation is and where it comes from. Inflation is essentially the increase in the prices you pay for goods and services. You have to spend more to get the same things. Some level of inflation – around 2% – is normal.

“While inflation has a negative connotation for many people, inflation itself is not inherently good or bad,” said Jill Fopiano, president and CEO of O’Brien Wealth Partners. “A certain level of inflation is a sign that the economy is healthy.”

Inflation is a characteristic of economic recovery. In the US, it is currently being driven by some overlapping factors resulting from the Covid-19 pandemic: low Federal Reserve interest rates, multiple rounds of direct government incentives for consumers and businesses, and pent-up consumer demand that will come back when the US reopens USA unleashed.

All of this has resulted in demand exceeding supply, which has led to bottlenecks and price spikes in the categories of goods including semiconductor chips, used cars and packages, among others.

“Just twelve months ago, many were afraid of even showing up from their homes,” says Deron McCoy, chief investment officer at the investment advisory firm SEIA. Intentional meaning: People didn’t spend. But now they plan to make up for the lost time, as we discussed a few weeks ago.

With that in mind, many economists and other financial experts say the current rate of inflation is nothing to worry about – it is temporary and expected even though it is unclear when it will eventually ease. And today’s surge is nothing compared to the 1970s, when several unique shocks drove inflation into double digits, McCoy says.

However, there will be a sticker shock this summer, McCoy says, as supply chains catch up with post-pandemic consumer needs.

Below is how higher inflation could cost you and what to do about it.

Consumer goods

Inflation undermines the purchasing power of the average person. The true rate of inflation is different for everyone because we all buy different products and services.

You can expect to pay more for used and rental cars, furniture, airline tickets, hotels, and everyday items like groceries and gasoline. Used car prices rose by 29.7% compared to the previous year, while clothing costs 5.6% more. Housing and renovation needs are sky high.

“All of this means your paychecks won’t be as good as they used to be unless your wages rise at the same rate, which most people haven’t,” said Steven Saunders, director and portfolio advisor at Round Table wealth management.

However, that is no reason not to spend any money, especially after the last 15 months, says Marguerita Cheng, certified financial planner and CEO of Blue Ocean Global Wealth. “You should just pay attention to the increased prices.”

Savings accounts

With interest rates on savings accounts already just above 0% nationwide, inflation can make your cash even less valuable. But that’s no reason to put it off, especially your emergency fund, Cheng says.

“Savings are not meant to be used to get rich,” she says. It is meant to provide a financial cushion in case you need it.

However, if you have more unused cash than you need in an emergency fund (experts recommend stashing the spending three to six months, sometimes more), you might want to invest some of it, she says.

Investments

It’s impossible to predict how inflation will affect all of your investments, but it will reduce the value of long-term bonds, which generally pay out a fixed income every year, says Brian Spinelli, Certified Financial Planner and Senior Wealth Advisor at Halbert Hargrove. Higher inflation means that the fixed amount doesn’t go that far.

Generation Z investors, millennials, and younger Generation X don’t need to worry about these short-term effects, experts say. You should stick well with your current investment plan, which is likely to be stock heavy. Stocks can provide a good hedge against inflation as they can generate returns above inflation.

With that in mind, long-term investors should continue to invest in a broadly diversified portfolio of low-cost equity index funds, says Tony Molina, auditor and senior product specialist at Wealthfront. If you have a 401 (k) or IRA invested in a target date fund or other stock index fund, you don’t have to do anything.

“It’s human nature to want to react in times of uncertainty, but it’s best not to get too involved in the inflation news,” says Molina.

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source https://dailyhealthynews.ca/what-the-heck-is-going-on-with-inflation-heres-what-you-need-to-know/