Answers to Your Inflation Questions

Been there, done that. Don’t want to do it again.

That’s how many people who lived through the 1970s and 1980s feel about inflation.

But today’s reality is that your money isn’t going as far as it once did, and you’re probably wondering if the situation will get worse.

Since there isn’t a crystal ball to predict what will happen with the economy, let’s focus on what we know.

Here are some of the most common inflation-related questions and answers.

1. What’s causing prices to rise?

Several factors have contributed to the price hikes we’re seeing everywhere: the COVID-19 pandemic and related shutdowns; government stimulus payments; problems with the supply chain; and a tight housing market are all likely contributors.¹

2. Will this be the next “Great Inflation”?

Much of how inflation plays out in the economy depends on what’s causing it. And luckily, the root causes of today’s problems aren’t the same as what caused the Great Inflation of the 1970s.  Due to the one-two punch of inflation, plus high unemployment in the 1970s, the recovery was slow.² In 1975, the unemployment rate was 8.5%. And while inflation is high today, the unemployment rate is low at 3.5%.³

3. How can I make sure I don’t fall behind?

The US government has recently announced several options to help you keep pace with rising prices. For example, the IRS increased the taxable income thresholds for seven tax brackets, which could save some people money. The IRS has also announced that it will raise the amount you can contribute to your 401k or 401(3)(b) account in 2023 by $2,000.⁴

Also, a cost-of-living increase of 8.7% will be sent to Social Security recipients, the biggest increase in over 40 years. These efforts won’t reduce inflation, but they are an attempt to help keep pace with inflation and minimize its impact on your pocketbook.⁴

By making a budget, and tracking and reducing your expenditures, you can avoid falling behind. Most importantly, make sure your emergency fund is maximized. There’s no escaping the fact that prices are rising across the board, so whatever your emergency is, you’ll have to spend more money to solve it.

4. How long until prices drop?

Price declines can’t be predicted, but there are mechanisms to contain them, like interest rates. To slow the economy and inflation, the Federal Reserve raises rates. The Federal Reserve was able to “break The Great Inflation” using this strategy, and if it can be done under the one-two punch of inflation and high unemployment that occurred in the 1970s and 1980s, there’s reason to believe it can be done now.⁵

And we’ve got another thing working for us in today’s economy – the Amazon effect, which is all about price transparency. With the ease of online shopping, you can find the best deal on just about anything, which makes high prices harder to sustain.⁵

5. Should I make any changes to my retirement plan due to inflation?

The answer to that question depends on your investment time horizon—which one of these scenarios applies to you?:*

• I’ll be working for at least another 20 years:
  If you still have a fair amount of time before you plan to retire, consider maintaining your position in a well-diversified equity portfolio and continue to follow the investment plan laid out by your financial professional. This strategy makes sense even in a down market because historically equities (stocks) have annualized gains of 7% to 9%. For example, between 1990 and 2020, the S&P 500 Index’s annualized gain was 7.5% (excluding dividends), which outperformed inflation.⁶

• I hope to retire within the next 10 years:
  If you’re approaching retirement, then you have less of a runway to make up for market swings or lost savings due to rising prices. You may consider further diversifying your equity portfolio, and potentially shift a portion of your investments toward annuities. Annuities generally present a lower risk profile and can provide an income stream. Inflation-adjusted annuities, which have variable cash-flows that adjust for inflation, may be another option to consider to further reduce risk as you approach retirement.

• I’m retired:                                                                                                                       If you’re already retired, you will likely want to stay in low-risk investment vehicles whose objective is to help your portfolio to continue providing the funds needed to cover your retirement lifestyle. Typically, financial professionals advise retirees to have a mix of annuities and bonds, which are historically low-risk and meet or beat inflation. Inflation-adjusted annuities may also further reduce your risk. 

Even though rising prices may make you question your long-term financial goals, don’t chase performance or try to time the market as these tactics are rarely successful and highly risky.

However, now is a great time to review your portfolio.

You may find that you already have inflation protection within your diversified portfolio, but you may find it helpful to talk with your financial professional who can provide insight into how inflation is affecting your investments.

If you would like us to review your portfolio or retirement plan, you can contact us at info@commonfinancialsense.com

Until Next Time……

Investment Advisor services offered by Connor & Gallagher OneSource, a registered investment advisor.

¹ Source: “What Is Really Driving ‘Inflation’ Today, Forbes.com, (September 2022).
² Source: “Lunch Box Stagflation Isn’t Your 70s Style Slowdown,” LPL Financial Research, (September 2022).
³ Source: “The Employment Situation – September 2022,” Bureau of Labor Statistics, (September 2022).
⁴ Source: “IRS Increases 401(k) Limit By Record Amount As Inflation Surges,” Financial Advisor Magazine, (October 2022).
⁵ Source: “Expect Inflation to be Contained Long-Term—No Foolin’,” LPL Financial Research, (April 2022).
⁶ Source: LPL Research, Bloomberg, DALBAR, ClearBridge Investments 6/30/21