Back in Episode 41 we talked about inflation basics. Today we’ll talk some more about what inflation is, who has the mission to control inflation, what we can expect, and some ideas on how it may affect you.
Put simply, inflation makes things you buy cost more. Another way to look at it, is that $1 after inflation is worth less, it has less buying power. Inflation is usually quoted as a percent per year. The Federal Reserve, often called "the Fed," is the central bank of the United States. A key mission of the Fed is to foster both maximum employment in the US and maintain price stability which interprets as keeping inflation growing at about 2% a year over the long-term. This can be a tricky balancing act. There are a lot of things that affect employment and inflation.
Unemployment is still well above pre-COVID levels. The Fed Chairman has said that he is focused on getting back to full employment and that he won’t be swayed by temporary rises in inflation. And the Fed announced last August that it would tolerate higher inflation than its 2% target rate for a modest period of time since inflation has been too low for the last 10 to 15 years.
Higher inflation isn’t necessarily a bad thing. If you have debt l you’ll be paying your loan back with dollars that are worth less than they are now. But for retirees living on a fixed income, each dollar buys less than it used to. Americans that were able to work through the pandemic generally spent less and saved, and now have more money to spend. There is a pent up demand for more goods and services.
If you have a home mortgage, see if refinancing while interest rates are still low makes sense for you. And if, if inflation is rising, don’t be in a hurry to pay that low interest rate loan off faster than necessary. Remember, you will be paying the loan back in the future with dollars that will be worth less because of inflation.
Stay the course with your long term investment goals. Stay diversified. Now is not the time to bet the farm and go all in on gold, or any other one “inflation proof” “sure thing.” Gold and real estate do tend to hold up well to inflation, but they are not fool proof. Gold and other commodities have huge price swings, they are very volatile. Real estate tends to beat inflation over the long haul, but with record low mortgage rates the real estate market is hot and prices are already high right now.
When your investments are diversified, for example with US and foreign stocks and bonds, perhaps real estate, and maybe even a gold or oil mutual fund you can rebalance when one investment category does much better or worse. This is a simple way of buying low and selling high.
Generally, wages tend to follow inflation up. If high inflation starts putting the pinch on, it may be a good time to ask for a raise. Or find another career that you enjoy, and that pays well will help you build a good financial future despite inflation.
If you’re a military retiree or CSRS federal employee you enjoy full cost of living adjustments (COLA) each year . FERS federal employees receive a smaller COLA and you won’t receive any COLA on your retirement pay until you reach age 62. Will permanently reduce your pension’s buying power. Higher inflation may be a good reason to stay in until 62. FERS employees who retire under the special provisions s can retire younger and begin receiving their COLA immediately.
Fortunately, Social Security payments are tied to general inflation and should maintain buying power better. Now for anyone that might have the ever-more-rare private pension or annuity, your pension is likely fixed. High inflation can significantly erode the purchasing power of your pension. And if that pension or annuity makes up a large part of your income in retirement, with higher inflation you may need to find other sources of income or reduce your expenses.
