Inflation

Submitted by Guy Williams on June 8, 2021

It is here and it is real. Inflation means that prices are going up for the things that we use and buy. The best and most obvious examples are groceries and gasoline. When you get to the checkout counter, your grocery bill is higher than it was last month. When you fill your car with gas, the price is higher as well.

The problem with higher inflation is that for most of us, our income is not going up as fast as prices. When this happens, our standard of living will begin to decline. This problem of a declining standard of living is most severe for senior citizens who are trying to live on a fixed income and /or trying to live on interest income since interest rates are not increasing as inflation increases.

So, what is happening? The short answer is that the government is responding to the COVID-19 crisis by spending a lot of money and by using the Federal Reserve Bank to keep interest rates at very low levels. The idea behind this strategy is that low rates will stimulate home buying and borrowing to expand the economy. The evidence is not all in yet, but so far, the Federal Reserve Bank is half-right.

The market for real estate and homes is red hot. Many sellers receive multiple over list price offers when they have homes to sell. This is great if you want or need to sell, but not helpful if you do not. I say not helpful because the increased prices will lead to higher property taxes and insurance bills. For people who plan to stay put, higher real estate prices just increase their cost of living.

The other problem occurring with high real estate prices is that living in your house will probably be more expensive. Unless you want to move to a smaller house or a less desirable neighborhood, the increased prices do not really help. So, if inflation is real and here. What can you do? The first and most important thing is to lock in your variable costs if possible. This means refinancing your home loan and locking in a fixed rate. It is still recommended to shorten your term if possible, because the emotional and financial wellbeing of owning your own home is very valuable.

If you own a business and can afford to prebuy supplies, go ahead and do so if you are not borrowing to buy inventory. If possible, ask your suppliers to commit to a fixed price in exchange for a guaranteed order flow.

The other inflation hedge is a good investment portfolio. A broad exposure to the United States stock market is recommended since U.S. stocks tend to go up faster than inflation.

No one knows for sure what will happen to prices. The chairman of the Federal Reserve believes that any price increase will be temporary. That is not certain and therefore it is recommended to take steps now to reduce exposure to rising prices.