A hodgepodge of economic factors has gotten us to where we are today. In retrospect, we are now experiencing some of the highest inflation in decades. As people worry about a potential recession, we are here to help you stay calm amidst the unknown and plan for all outcomes.
To address the top concern for U.S. citizens, 70% (seven out of ten) view inflation as a very big problem for the nation, trailed by health care affordability (55%) and violent crime (54%). That’s a large number that we thought would be letting up by now. So if you’re asking, “is inflation coming to an end?” we have some insight for you.
Understanding inflation can help you better navigate it. Use this guide and reach out for financial guidance.
How does rising inflation affect the stock market?
It may help to know that sustained periods of inflation are considered rare in American history. For ten consecutive years (1973-1982), inflation exceeded 5%. There are only seven instances of successive years of 5% inflation in U.S. history in the 1800s. So what does this tell us?
Knowing how inflation impacts the stock market will show you that it will likely get volatile, there’s no reason to panic, and corrections are normal. Since stock prices and returns are mainly based on the expectations of future earnings for companies, market volatility poses challenges as the indexes become hazy.
As companies adjust to higher prices for inventory, materials, and labor, this can also impact earnings. This creates volatility (stock prices fluctuating). When you experience significant volatility in early retirement, causing negative market returns, this can potentially affect the longevity of your retirement portfolio.
This sequence of returns risk should be assessed by a fiduciary financial advisor who fully understands your financial goals and time horizon and puts your best interests ahead of their own. Remember when the value of the dollar declines as inflation hits and your purchasing power seems to go out the window, don’t react. Instead, rely on your financial professional for guidance.
Wage increases and rising inflation – no silver lining here.
If real pay (adjusted for inflation) had kept up with the pre-pandemic trend, it should have risen by at least 2%. However, real wage growth depends on how long inflation remains elevated, how tight labor markets are, and whether employers adjust wages to account for it. Unfortunately, low wage growth is predicted for the rest of 2022 as inflation is only thought to start letting up as the Fed tries to tame it.
It’s not likely that an increase in real wages will grant us the previous trend. To cut your losses and make up for the hit, make sure you do everything possible, like proactive tax planning and investing wisely.
Decreased debt value – a good thing.
There is good news for borrowers during times of inflation. A rule of thumb, inflation causes the value of the dollar to decline over time, which means cash now is worth more than cash down the road. Inflation allows debtors to pay back lenders with money worth less than it was when borrowed initially.
This is also helpful for lenders because they can extend new financing, and as lower wages result in a higher need for credit, they welcome new borrowers. And as interest rates go up to help lower inflation, they will pocket more.
Homeowners benefit big time.
Generally speaking, homeowners are less affected by inflation than renters. That’s because of a lower inventory of housing caused by pandemic-related construction delays and fewer people wanting to relocate. Even so, real estate remains competitive even while mortgage rates and prices of homes rise rapidly.
RE/MAX shared some recent data that around four million to six million fewer homes are available than needed to meet demand. So what does this tell us?
- If you’re renting, your monthly rent has more than likely increased.
- If you own a home, you are likely benefiting from a steady mortgage.
- You shouldn’t have trouble finding a buyer if you want to sell.
- If you sell your home now, you will join the competitive market picking through a slim inventory that is marked up.
If you are renting and need to find a way out, you will likely pay more than in a cooler housing market. If you’re debating whether to sell and buy anew, that’s dependent upon what you are comfortable with. Real estate is an attractive option if you want to add to your investment toolbelt.
5 things you can do with your money during inflation.
If you are looking for some ideas on what to do with your money during inflation, consider these six things:
- Invest in your home
- Create and abide by a budget
- Pay off your existing variable debt
- Maintain an emergency fund
- Look into the inflation-proof investments
There is money to be made – inflation-proof investments.
During an inflation surge, it’s wise to look into adding some safety to your portfolio. Some of the less volatile options include (but are not limited to):
- Treasury Inflation-Protected Securities (TIPS)
- The S&P 500
- Short-term bonds
- Real estate
- Real Estate Investment Trusts (REITs)
- Leveraged Loans
Most importantly, ask for help if you are like most Americans who simply don’t have the time, experience, or desire to manage their wealth. Request a complimentary portfolio analysis today to get started. We look forward to supporting you in the long term.
Share your inflation concerns with a financial advisor in Bountiful, UT, at ARS who specializes in wealth management.
CERTIFIED FINANCIAL PLANNERS™ at Advanced Retirement Strategies
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Our team of retirement planners and investment advisors in Bountiful, Utah specializes in helping diligent savers with $250,000 or more of investment and retirement assets (not counting your primary residence) prepare for and then transition into retirement.
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