The Bureau of Labor Statistics announced that the prior 12 months had 4.2% inflation for the past 12 months, the largest increase in 12 years.
So what does this mean and what has happened?
Inflation is simply prices going up. There has always been inflation and will continue to be. If you think back to how much it cost to go to a family dinner and movie in the 1950’s it may have cost a family of five $1.50 total for that night out! Today, that may cost $150 total. That is inflation in a nutshell.
Many people talk about the Federal Reserve and this notion that they create inflation, but that is actually part of their mandate – to have a low unemployment and create modest inflation.
The opposite of Inflation is Deflation - in which prices go down instead of up. Generally, we have been in a deflationary world for a long time, but people have talked less about this. We don’t notice the deflation in our lives, as much as we notice the inflation.
For example, seeing the price of a laptop that is better and faster than it was 10 years ago, now costs only $1K instead of previously costing $2K. This is deflation.
Overall, large scale deflation is bigger problem than inflation, and the government is very interested in not having deflation.
I believe we are in a period of Transitory Inflation, in which there have been certain factors that have caused some recent inflation, but it will go away and will be solved.
Here are some recent examples of things that caused Transitory inflation:
When Russians hacked a colonial pipeline, there is a sudden increase in the price of oil
When a shipping truck blocks the Suez Canal, and things cannot be delivered on time
When people get stuck inside for more than a year due to a Pandemic and cannot spend money and the government gives out stimulus checks and PPP money to businesses. Then people emerge when the pandemic is over and want to spend lots of money on boats, and restaurants, and vacations, etc.
What should you do about it?
Well, there is nothing you can truly do about it. But it is not all a bad thing.
The cost of borrowing has come down with drops in interest rates. For example, while a house’s price may cost more, mortgage interest rates have come down, and overall, the affordability of houses has improved due to this.
Many people can be winners in this type of situation. If inflation drives the value of your house value up, and your wages up, and you refinance your mortgage to a lower monthly payment, all of that is good for you.
You also can think about how you are invested:
If inflation costs 3-4%, and you are all invested in cash which is earning 0%, or bond earning only 2% or less - that can be problematic.
Meanwhile, if you are investing in stocks or real estate that is earning 7% for example, that can be a good thing.
However, it still makes sense to have some money in bonds and cash to have money available if things hit the fan and there is a market drop.
As Warren Buffet says – cash and bonds are a short-term safe haven, but long term money should be invested for growth using stocks.
I hope this provides some brief and concise education-101 on what is going on and you find this helpful!
