Following a year of economic instability, it appears that many of us are turning our attention to something that’s been around for decades, but has recently piqued national interest - inflation. In fact, a recent study found that people are Googling the word “inflation” at a rapid rate, with a peak not seen since 2008.
Since the start of the COVID-19 pandemic, six major stimulus bills totaling around $5.3 trillion have passed. With these efforts to alleviate pandemic-fueled financial strife, investors are wondering how inflation levels are being impacted.
The CPI numbers released in March 2021 can be a bit confusing. Year-over-year, consumer prices rose 2.6%--a fairly moderate number, and one which was undoubtedly due in part to the price drops seen at the onset of the pandemic. But the inflation rate rose 0.6% between February 2021 and March 2021—the largest monthly gain since August 2012. So how do we account for this discrepancy?
Fed Chair Jerome Powell has said that inflation is likely to pick up as the economy recovers from the pandemic, but he believes it will be temporary. Powell has also stated that the central bank plans to keep short-term rates anchored near zero through 2023.
As a sales professional, inflation should be a key concern for you. Not only could a higher rate of inflation affect your own purchasing power, but that of your target customer.
As you consider any potential changes to inflation we may be seeing this year, here’s a reminder about what inflation is and how it can affect you and your investments.
What Is Inflation?
Inflation is defined as an upward movement in the average level of prices. Each month, the Bureau of Labor Statistics releases a report called the Consumer Price Index (CPI) to track these fluctuations.
Understanding the Consumer Price Index
The CPI was developed based on information provided by families and individuals on purchases made in the following categories:
- · Food and beverages
- · Housing
- · Apparel
- · Transportation
- · Medical care
- · Recreation
- · Education and communication
- · Other groups and services
While it’s the commonly used indicator of inflation, the CPI has come under scrutiny. For example, the CPI rose 1.4 percent between January 2020 and January 2021 – a relatively small increase. A closer look at the report, however, shows the movement in prices on various goods tells a different story. Used car and truck prices, for example, rose 10 percent during those 12 months. Great news for a car salesman! Not such great news for someone in the market for a used vehicle.
Investments & Inflation
Inflation can affect investments in several ways. Most notably, it can reduce the rate of return, risk purchasing power and influence the Federal Reserve.
Rate of Return
Inflation reduces the real rate of return on investments. Say an investment earned six percent over a 12-month period. During that time, let's say inflation averaged about 1.5 percent. That would mean that your investment’s real rate of return would have been 4.5 percent - not six percent.
Inflation puts your purchasing power at risk. When prices rise, a fixed amount of money has the power to purchase fewer goods and services. How will this affect your customers’ spending habits? Will they be less inclined to purchase what you are offering on a reduced budget?
The Federal Reserve
In addition, inflation can influence the actions of the Federal Reserve. If they want to control inflation, the Federal Reserve has several ways in which it can reduce the amount of money in circulation. Hypothetically speaking, a smaller supply of money means less spending - which could equal lower prices and lower inflation.
When inflation is low, it’s easy to overlook how rising prices are affecting a household budget. And when inflation is high, it may be tempting to make changes to your financial standings and portfolio. However, remember it is best not to make any major money moves without first consulting your financial professional.
If you’re a sales professional concerned about the inflation rates we could see in 2021, contact Meenes Wealth Partners today. We can help you determine if changes need to be made or if you and your portfolio are well-prepared to handle a significant increase in inflation.