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Inflation: What is it and what do I do about it?

If you have bought gas for your car or groceries recently you probably have noticed an uptick in prices. This is an example of inflation that is easily understood by everyone. The harder thing to understand is why it happens.

Inflation happens for many reasons. One of those is when too few goods are available to meet consumer demand. An issue contributing to this right now is a supply chain shortage and labor shortages, which are interconnected. Current news coverage says labor issues are causing barges to sit unloaded. The supplies and components for manufacturing and products that people want to buy are stuck sitting. The issue doesn’t stop there. There is also a lack of people to drive the trucks to get the goods where they need to go. People in the trucking industry have told me that Amazon is gobbling up the drivers as they have competitive pay and benefits and do not have do any long hauling requiring long distance driving. So, the result is too few goods chasing too much demand, which causes prices go up.

Another cause for inflation is that the cost of labor is increasing. Workers are in a very strong negotiating position right now and are demanding higher wages and benefits. You have probably heard about the labor strikes (John Deere for example) occurring around the country right now. If wages are increased, the prices for those goods produced by those workers will be increased.

Inflation also occurs when the money supply is growing faster than the rate of growth in the overall economy. Simply put when people have more money to spend, they tend to spend more of it. If demand for goods and services is increasing and people have the money to spend on the higher prices, inflation will happen.

The big question right now is whether the inflation we are experiencing is temporary or permanent. The cost of groceries and other goods can go up or down depending on the supply. However, when wages get increased it is very hard for employers to reduce those wages in the future. So, the outlook is probably mixed. Some inflation may be more permanent in certain areas of the economy, and in other areas of the inflation may be temporary. There are a lot of different opinions on this topic right now. Which is understandable since we have never been in a situation like we are right now.

Other than prices you pay for goods and services, how does inflation impact you? According to an article on Kiplinger (https://www.kiplinger.com/investing/603051/hey-investors-don’t-panic-about-inflation-do-this-instead), for investors, historically “there has been a positive correlation between value stocks and performing well during inflation as their value is less affected by rising interest rates. This is in contrast to growth stocks, which are often negatively affected by inflation because of their value is expected to appreciate in the future.”

For savers, inflation is bad. Normally savers lose from inflation. When prices rise, the value of money falls and the real value of a savings account falls. Especially when factoring in the impact of a taxable account.

The takeaway from all of this is that it is important to have a strategic plan for your money. You need to have growth to offset the impact of taxes and inflation. It is important to limit the amount of savings you have to what you need for emergencies. The third component is to have a portion of your money allocated to provide income to you safely and which you will never outlive. Within your portfolio it will be important to allocate some of the positions to the segment of the portfolio that does well during inflation, to take advantage of what otherwise could be a perceived negative.

We can make sure you are structured correctly and help ensure a successful plan for you and the people and causes you care about.

 

Written by: Jay Weyers, CFP®

weyers_jay@nlgroupmail.com

815-455-5292

Weyers McKeever Financial Partners

Your Vision · Our Team

 

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