Inflation Is Up – What Does That Mean For You?

As you may have already seen, the March CPI report was released earlier this week. CPI is the Consumer Price Index, which is used for determining the what the inflation rate is. For more information on CPI and inflation, check out the previous Escient Financial Insights post Understanding Inflation in 2021: What Investors Need to Know. The March CPI report showed that the year-over-year annual inflation rate rose to 8.5%, which is the highest it's been in over four decades. These CPI reports come out monthly and show the inflation rate for the previous month, which is consolidated with reports for previous months to arrive at the headline annual inflation rate you see in the media.

However, there is more to inflation than just the headline annual rate you primarily see in the media. Another important factor is how quickly the rate of inflation is increasing or decreasing. For March is was 1.2%, for February it was 0.8%, and for January it was 0.6%. This shows that we've seen an increasing rate of inflation month-over-month.

While we are seeing the biggest jump in prices since September 2005 and the highest annual inflation rate since 1981, there are some positives that may be interpreted from this recent CPI report. For example, if food and energy are excluded, the rate at which inflation is increasing is actually slowing. Certainly, food and energy are two things that we all must pay for in our daily lives, but those prices fluctuate more. That means, when those prices rise, they tend to not stick at those higher prices. It is possible that those prices could drop back down toward the previous lower pricing there were at before.

While U.S. consumers are more likely directly impacted by food and energy prices, the Fed is more concerned with prices changes that will stick. This is where the measure of core inflation comes in, which excludes food and energy prices. In March, core inflation rose 0.3%, which is actually lower than February's core inflation rate of 0.5%. With core inflation appearing to slow at least for now, the Fed may be motivated to back away from its recent plan to aggressively fight inflation. In fact, U.S. government bond yields fell on Tuesday due to signs of potential tentative signs of easing inflation pressures.

Although there does seem to be some optimism that inflation rate increases could be slowing, and might have even peaked, it's important to pay close attention to service sector prices and wages. For example, rent and other housing expenses are increasing more rapidly, and wages are increasing as well. This is increasing costs for employers, and that may cause employers to raise prices for their services and products, passing those increased costs on to consumers. This momentum will need to cool before everyone feels inflation is under control.

To put inflation in perspective, if you have cash saved away and inflation is consistently at 4%, it takes 17 years for the purchasing power of your money to be cut in half. If inflation is only 1% higher at 5%, it only takes 14 years for the purchasing power of your money to be cut in half.

For those who are still working, hopefully your wages are increasing at the same rate as inflation.

However, for those in retirement, that may not be the case. Retirees don't have the benefit of earning higher wages unless Social Security, which has a cost-of-living adjustment that increases benefits to compensate for inflation, covers at least 100% of expenses. Instead, retirees have to invest wisely and have to invest for the long-term for their hard-earned money to keep pace with rising prices. Or perhaps you don't need your money to keep pace with inflation because you've been a good saver or your expenses are so low that you can afford to be more conservative when it comes to investing.

These are historic events, so of course this leads to the question of what should retirement savers and investors do in response to inflation? There is no one-size-fits-all solution for dealing with inflation, or for investing in general. The solution, the financial plan, that will work for you will depend on you, your situation, your needs, and your goals. That's why Escient Financial is here... to help clients prepare for their future retirement and navigate them through an existing retirement and other financial situations. There is a solution for everyone, but the solution for each individual is different. To get help figuring your solution out...