Why is inflation such an issue – and will be even more so in the future?
When I mention inflation, some of you may tune out right away out of boredom, while others may think that we’re talking about blowing up the air mattress in the spare bedroom because guests are coming over.
But the topic of inflation is just as important to understand as the subject matters of wages, interest rates, and retirement planning.
Today, I’ll tell you why.
Put simply, inflation is a measure of the rising cost of goods and services in our economy. For instance, a gallon of milk may cost twice as much today as it did twenty years ago, but the price of technology and some electronics has actually come down (except for iPhones!).
Therefore, inflation helps us measure how far our money goes, and we all know that a $30,000 salary went a long way in 2000 but makes for a threadbare household budget today.
So, the things we could buy with a $50 bill in 2000 (as an example), may require a $100 bill to purchase them today!
Our Federal Reserve bank monitors inflation in the U.S., and generally holds a target of 2% (or below) for the rising cost of goods and services. The annual inflation rate in the U.S. over the last twelvemonths is about 1.8%, so we’ve been just under that threshold.
But if inflation gets too high, it devalues our currency as well as makes your earnings, savings, and investments worth less.
So, if our stock portfolio returns a 5% return one year but inflation was right at 2%, we actually only earned or realized a gain of 3% after inflation!
What will inflation do next? Because we’re in the midst of unprecedented economic times, and no one knows exactly what will happen next – including renowned financial experts and the leaders of the largest economies in the world.
For instance, Ray Dalio, the man who owns the biggest hedge fund in the world, Bridgewater Associates, believes that the rate of returns we see will never go back to the 8-10% range we enjoyed during many parts of the market, and only a decade ago.
Ray, and many other financial experts, believe that rates of return in the 4-5% range are far more realistic.
With increasing inflation, that means we have a shrinking margin of error for us to earn a tidy profit and see our nest egg grow.
The window is still open, but it’s half closed and shutting more every day.
I’m not going to lie to you and claim to know exactly what’s going to happen.
But the writing is on the wall and it’s hard to envision another decade without at least a major correction – and a good way to track that is by watching our national inflation rate.
This correction will be bigger than the Great Recession of the mid-2000s (and maybe even a Depression!) due to the massive amount of debt growth in the private sector, held by corporations and even our government.
Therefore, our strategy should be to play it safe, focus on eliminating debt, building guaranteed sources of income, while still jumping on great opportunities in the markets if we see them, albeit extremely selectively.
Now that you understand inflation and its role in our economy, let’s review your investments to make sure they’re keeping up with inflation and safe from devaluation!
Your financial guru,