The significant amount of money that is being pumped into our economy from various stimulus packages is having an impact on the cost of goods. The price of food, gas and materials for home improvement projects have risen dramatically over the past few months, with double and even triple digit inflation. With the overall easy monetary policies that have been put in place, it’s no surprise that inflation is alive and well right now. Read on to learn more about how rising costs will impact the economy and some areas of silver lining to consider as we tread through 2021!
The Driving Force Behind Inflation
Inflation is the increase in price of goods over a period of time. With record low interest rates, easy monetary policies from the Fed and stimulus packages pumping up debt to record levels we need to consider the fact inflation may be upon us and possibly for some time. Unless we start reigning in spending and stabilizing the dollar the rise of prices may very well continue at a faster clip than we have seen in generations. Not to say that inflation rates can’t calm down, but we do need to be prepared.
COVID’s Impact on the Supply of Goods
There are two ingredients that populate inflation: demand and a lack of supply. There were worldwide lockdowns in 2020 resulting from COVID which disrupted domestic and overseas manufacturing. This disruption affected the supply of goods, specifically cheap goods. As we start seeing an increase in supply with the reopening of manufacturing plants, we can expect the price of certain commodities to start coming down.
The Hidden Cost of Printing New Money
The Federal Reserve has printed over six trillion dollars in new money as part of the stimulus package in the first five months of 2021. While many view this stimulus package as a way of keeping the economy going, increasing the money supply has a hidden cost and plays a major role in driving up inflation. In the past year, we saw massive renovations going on across the United States on existing homes. There was a substantial demand for lumber and yet not enough by any stretch to meet the demand. As a result, lumber prices increased by 400% which was passed onto the consumer.
What to Consider with Your Investment Dollar
The first vehicle that you should always look at is being an owner of assets. Owning property, stocks or even a business will typically fair well vs. cash. On the financial assets side, being an owner and not a lender/creditor is going to be quite important if you’re trying to pursue an inflation hedge or at least an ability to pace with inflation. History shows us that asset owners prevail, and lenders and creditors get damaged. Owning assets that have a chance to keep up with inflation may very well be a strategy to consider if you are sitting on too much cash.
Currently, the national debt is hovering around $30 trillion with an additional 160 to 180 trillion in unfunded liabilities between Medicare, Medicaid, Social Security and so on. With interest rates at 2%, it’s highly unlikely that the Federal Reserve would increase rates anytime soon. As a result, you will find that you’re not making any money at the bank with your savings accounts, CDs and treasury bonds. If the Federal Reserve were to increase rates, then the interest payments that the Federal Government has to pay on the Federal debt would drag on our debt even further.
The market has been conditioned so that the Federal Reserve is always going to be a backstop in this current environment. Until we’re really far out of COVID, it just seems highly unlikely that the Federal Reserve would do something to derail market conditions intentionally, at least.
If you’re concerned about how inflation will impact your financial assets and retirement goals, consider talking with one of our financial planners at Financial Dynamics & Associates, Inc. As a firm focused on these issues in the Midlothian and Richmond, Virginia metro area, we may be able to help advise you based on your overall financial situation.
This information is not intended as a solicitation or an offer to buy or sell any security or investment product. Advisory services offered through J.W. Cole Advisors, Inc. (JWCA). Financial Dynamics & Associates, Inc. and JWCA are unaffiliated entities.