As you may have heard inflation over the last year was 7.5%… that means that prices of a basket of goods that most people buy went up 7.5% from the prior year. What does that mean for all of us?
The first thing to explain is that inflation (or prices going up) was not even across the board, some stuff went up a lot and some stuff didn’t go up that much. For example used car prices were up 40%! But electricity bills were only (“only” ha ha) 4.2%. This means that each individual person or family is going to experience inflation much differently. Another great example of that is the difference between people who own their home and have a fixed rate loan versus renters. Home owners get the fantastic benefit of having a big chunk of their monthly expenses unaffected by inflation, so they are experiencing less inflation to a certain extent.
So how we each are experiencing inflation right now is different from person to person, some are getting hit left and right with price increases that are adding up to a huge impact on their financial life, while others though annoyed may not be affected in any material way.
The real question going forward is what happens to inflation over the next few years. Things like used cars and energy have a way of correcting themselves. Car companies can make more cars if that’s what people want, and more power can be produced if prices get too high. But the real problem is when inflation starts to seep into things like rent and wages. If because of all these recent price increase employees start demanding higher wages and businesses give them those, then that easies the pressure on prices, and makes it more likely that prices could continue their march upwards. This is what economics call a wage price spiral, as people make more money they are able to buy more stuff, and that stuff is hard to get so prices go up, and then people ask for more wages, and can buy more stuff and up and up it goes.
In the past this wage price spiral has been held back by an abundance of people wanting to work, and cheap imports from other countries. But today, both of those things are not there. Businesses for a variety of reasons are having a hard time finding workers, and companies are trying to bring more production and inventory back to the US having learned some hard lessons during the pandemic. Both of these could help support the beginning of a wage price spiral.
So what does this mean? Its hard to say at an individual level how inflation will effect you. But there are some things you can do to help ride this wave of disruption.
- Make sure you are in a position that you can ask for or will receive decent raises as things progress. This is easier said than done, but at least be a little more aggressive in fighting for your raise, the job market is your oyster, remember that before you become too scared to ask for what you are worth.
- Look at your expenses, are there any things you can turn from variable to fixed? If your renting and like where you are living, can you ask for a 2 year or 3 year lease? If you own your home can you install solar panels to remove electricity costs? Is there anything you can prepay out for a year or more?
- Invest your money with inflation in mind. This is a complex topic because inflation has weird effects on all asset classes. But over the long-term (10+ years) investing in things that have inflation pass through them, like the stock market, or who benefit pretty directly from inflation namely real estate and commodities are good bets. Even though cash and bonds are important they can become a real drag over a long period of time of high inflation, tread carefully.
Everyone should be thinking about this. Inflation may fade away over the next couple years and it never becomes a major issue, or we could begin a long inflationary period. Make sure you are putting the things in place you need to not only survive but thrive if inflation should stick around.