Inflation. Is it good for the economy?
By now, everyone has noticed the increase we have seen in gasoline prices. The same goes for food, and if you are doing any work on your house or trying to buy a car, you will experience some difficulties and higher prices there as well.
This rise in prices can be attributed to supply and demand issues. When there is a large number of people buying a product that is not abundant, it simply causes the price of that product to rise.
Conversely, if few people want a product that is widely available, the price can drop.
If you keep a balance on a credit card or have a home equity line of credit (HELOC) or an adjustable-rate mortgage, you might be noticing an increase in your payments. Higher interest rates have been working their way through the various financial instruments, and it doesn’t appear like that will change anytime soon.
On the plus side, we should see interest rates move a bit higher on certain types of savings accounts. Generally speaking, these savings accounts will not keep pace with inflation. If this is a concern, see the paragraph below on I bonds.
The Federal Reserve has indicated it plans to keep raising short-term interest rates to help manage inflation, which is at its highest level in 40 years. You’re likely to continue seeing the effects of inflation when buying gas, groceries, and you’ll notice it if you are shopping for a new or used car. As long as demand is high and supply chains are bogged down, this will continue.
The Federal Reserve’s job is to control inflation. By raising interest rates, the Fed hopes to slow spending, bringing down consumer prices. It is already anticipated that the Fed will raise rates again when they meet on May 4th (probably around ½%) and this potential increase has most likely already been factored into the stock market.
Time will tell whether higher interest rates will prompt us to consider additional changes to your portfolio1. Remember, your overall long term strategy factors in that there will be transition periods in the economy.
If you have idle cash that you don’t need for at least 12 months, you may want to look at I Bonds, which are issued by the U.S. government and earn a fixed interest rate plus a variable interest inflation rate that’s adjusted twice a year. I Bonds have certain restrictions, so they generally play a limited role in your financial picture however, with a rise in inflation, these bonds are paying between 7% and 9% depending on when you purchased them.
If you have any questions about inflation or interest rates, how to purchase an I bond, or anything else on your mind, please don’t hesitate to reach out to me. We’re always here to help.
So, is inflation good for the economy? Like ice cream, a little is good but too much for too long can wreak havoc. If prices are rising, one can have less to save or spend (Spending tends to help the economy). If one's income rose at the same rate as inflation, that would help balance things out but that generally doesn't happen for most workers. Especially those in lower paying jobs which can really affect that segment of the population more.
Feel free to reach out to me if you have any questions. I’m here to help.
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Here's another article we wrote on inflation. "So, what's the big deal about inflation?" Check it out HERE
All the best.
Rick Fingerman, CFP®, CDFA™, CCPS®
Rick@PlanWithFPS.com
617-630-4978
1 Depending on your particular time frame, risk tolerance, asset allocation, and overall goals, is a determining factor on what types of investments you may hold. Clients should contact us to review how these changes may apply to their specific plan.
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.