The pain of rising prices
One of the biggest financial concerns right now is inflation.
You cannot visit a gas station or grocery store without feeling the devastating effects of rising prices. These price increases erode your purchasing value. It is like a hidden tax and these cost pressures hit lowest income people the most.
The 10-year yield on government bonds is flirting with 2%. This interest rate is often the influencing fact for mortgages and other loans. Anyone with a variable rate should try and lock in a fixed rate as soon as possible. Paying a higher mortgage payment on top of all the rising costs of goods and services could be too much for your budget to bear.
January’s wholesale inflation surged 9.7% from a year ago. There are several different ways to measure inflation. The government prefers to use a method that excludes food and energy prices, because they think that is a little less volatile. However, are those not two of the most important costs to consumers? No matter what index you use, inflation is at a 40-year high.
Better quality chocolates were selling for more than $15.00 per pound this Valentines Day. Steaks that could be bought two years ago for $10 per pound are often 50% more. Bacon, by some estimates, is up 30% this year. While many people’s wages are up because of the labor shortage, people cannot keep up with the pain of these price increases.
Some inflation is more temporary and likely to ease quicker while some areas will permanently feel the higher price pressure.
An example of short-term inflation might be gasoline prices. There is currently some inflation in this area from the possible invasion of Russia into Ukraine. Russia is the second largest oil and gas producer in the world. If NATO were to cut off purchase in retaliation of an attack or if Russia withheld production in response to sanctions, this could keep prices higher, but they would come down.
When a refinery has a temporary shut down because of a storm or some other disaster, we expect prices will eventually come back down. Something to remember: a big part of gasoline prices are taxes. As the large infrastructure bill takes effect, often taxes are increased to help cover the cost of building new roads and bridges.
Some inflation rates climb and fall more quickly, and then find a new normal level usually much higher than they started out. A good example of this could be lumber prices. In May 2021, lumber prices hit an all-time high. They were at levels we had never seen. They fell down substantially until this past December when they started rising again. According to Random Lengths, a price tracking service, while current prices are down 22% from last year’s peak, they are still three times higher than their pre-pandemic level.
The National Association of Home Builders estimate that this has increased the price of a newly built home by $18,600. People will be paying higher interest on their mortgages to buy a house. This cost will also be permanent.
We are hearing from some economists that inflation will run closer to 3% next year. That might be an optimistic target with how badly many economists predicted current rates. That would still be twice the target preferred rate of 2% by many governments. It is important to remember this increase would be on top of current increases and not in any way a rollback of current inflation, but an addition it. In the 1980s, inflation ran high for close to four years.
The FED has no choice but to raise interest rates and most likely more than many are predicting. This will have a major impact on bond values and most likely the stock market. Make sure your asset allocations match this new financial environment.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.” If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.