Inflation, a sustained rise in prices of goods and services over time, can strike fear in investors and retirees. If inflation rises too rapidly it can affect consumers’ standard of living and the economy overall.

Former professional baseball player Sam Ewing coined,

“Inflation is when you pay $15 for the $10 haircut you used to get for $5 when you had hair.”

Inflation has swelled in 2021 hitting the highest point in more than 30 years this past October. This is paired with a jump in consumer prices measured by The Consumer Price Index (CPI). The CPI has risen 6.2% from October 2020, .09% monthly, the largest rise since December of 1990 (U.S. Bureau of labor statistics).

Fed Chairman Jerome Powell and Treasury Secretary Janet Yellen have admitted inflation has been more persistent than expected but believe conditions will return to normal over the next year or so. With escalating inflation measures, the Fed may resort to a tightening in monetary policy to slow an overheating economy. A Federal hike in interest rates was initially expected to occur in September 2022, however due to the persistent rise of inflation these rates may rise as early as July 2022.

The Fed has a target inflation rate of 2% and moderate inflation can be seen as healthy in any economy; however, during inflationary periods consumers are typically dissuaded from spending due to unjustifiable prices.

The question we must subsequently ask is: what is driving this force?

Bottlenecked supply chains? Low labor force? Rising demand due to reopening from the pandemic? All these phenomena likely share a role in the spike in prices for goods and services.

When demand for a product increases, the prices tend to rise as well.  When consumers are willing to pay more for the same good or service as they previously paid, this is known as demand-pull inflation. We witnessed a demand for services and products when the economy reopened. As demand grows the available supply diminishes which can result in higher prices.

On the other hand, rising costs of raw materials and labor can also cause inflation to jump.  Higher wages and increased production costs can cause the price for a particular good itself to rise.  Since the initial lockdown the United States has seen rising wage pressures as labor struggles to absorb higher living expenses. Additionally, spikes in the cost of raw materials such as lumber, fuel, etc., known as cost-push inflation has plagued Americans since the re-opening of the economy earlier in 2021.

By making money saved today, less valuable tomorrow, inflation is an obvious concern.  No one enjoys realizing the reduction of the purchasing power of current savings. It is imperative to have ample liquid saving to meet upcoming needs. With that being said, the lingering threat of inflation throughout one’s lifetime and retirement are why participation in the broader financial markets is often suggested by financial professionals. We are firm believers in only taking the amount of risk needed to meet your goals. If your situation or goals have shifted, please reach out to our team so that we can help make necessary adjustments within your plan. Your financial plan is living and breathing, just like you. It constantly changes with life’s ebbs and flows and should be adjusted and reviewed accordingly.

We wish you and your families a happy holiday season!

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