As good as it feels to be exiting the pandemic and enjoying a relatively normal summer, the ongoing economic fallout from COVID-19 and the levers our government pulled to accelerate recovery have a lot of folks worried about inflation. Those fears spiked recently after the Bureau of Labor Statistics reported that consumer prices rose by 5% during the month of May, the biggest jump since 2008. Those numbers are ringing alarm bells for some of our older clients who don't like being reminded of 1970s stagflation as they're nearing or beginning retirement.
On today's show, we discuss whether inflation is inherently bad, what rising costs say about the health of our economy as a whole, and how our investment philosophy accounts for inflation over the course of a modern retirement.
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1. What is the consumer price index?
The CPI is a basket of goods and services that our government uses to monitor inflation. The sectors that factor into the CPI are food and beverages, housing, apparel, transportation, medical care, recreation, education, communication, and other goods and services. These are all weighted based on how the government sees people are currently spending their money. In the most recent CPI, housing is weighted the highest at 42.2% -- no surprise if you've been following the booming housing market or if you listened to our last episode.
The government also tracks a separate core inflation rate, which includes more volatile food and energy prices. That core rate rose 3.8% in May, which is the biggest jump in nearly 30 years.
2. What's causing inflation?
A confluence of factors is pushing up consumer prices right now.
Whether you're for or against the recent recovery packages, it's a fact that this is the most money our government has ever spent on economic stimulus. Folks who are skeptical of modern monetary theory worry that printing so much money is going to have a negative long-term effect on the value of the U.S. dollar. We're also dealing with supply chain issues that have caused shortages in everything from chicken wings and lumber to computer chips. And while jobless claims are declining, we do still have millions of people out of work or dealing with income fluctuations due to the pandemic.
But it's all the folks charging out of lockdowns and into the summer who are probably driving up consumer prices the most. A year's worth of pent-up demand for travel, dining, and entertainment is really exploding now that vaccines are readily available and businesses are reopening.
3. Should you be worried?
One of the reasons that we're not overly concerned about inflation at this time is that the factors I just described probably aren't going to last. Federal spending will probably slow down after President Biden finalizes his infrastructure deal. More folks are going to reenter the workforce which should help improve their purchasing power once COVID-19 unemployment benefits run out. And after this summer surge, it's likely that demand for goods and services will start to plateau and stabilize.
It's also important to put CPI data into the proper context. Of course prices are higher now than they were a year ago: everyone was stuck at home! But compared to pre-pandemic January 2020, the costs of things like airfare, hotels, and buying a car or truck are actually lower today.
Finally, I tend to push back a little bit on the idea that rising prices are always a reason to panic. Right now, the CPI is higher because we've made a remarkable recovery from the pandemic. In the big picture, inflation is a natural byproduct of our economy continuing to grow. Yes, expansion drives up prices, but it also raises standards of living and inspires more corporate innovation and entrepreneurship.
Of course, those rising standards do create some challenges for seniors who need their assets to support a healthier, longer retirement. That's why, at Keen Wealth, we strive to build very conservative inflation projections into our clients' financial plans. By planning ahead, we can help folks get the best life possible out of their assets during retirement, while also helping them maintain the financial flexibility they need to manage the unexpected and follow their passions to new and exciting places.
We’d be happy to talk to you about how your financial plan takes inflation into account and any other life or economic issues that are on your mind. Call up Keen Wealth and let’s have a conversation soon.
Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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