There is no question about it: Your dollar doesn’t go as far as it used to. The inflation rate has increased steadily throughout the United States, holding steady or rising every month of 2021.
As of February 2022, inflation had risen by 7.9%—the highest increase in decades. This means that everything costs more. Of course, this begs an obvious question: Why are prices going up?
Inflation is real, and it can make a variety of financial decisions—like financial planning—far more challenging.
While there is widespread agreement on the current state of inflation, there is less agreement about what this means or why this is happening. As such, this article will look at what inflation is, why it is occurring and how to protect yourself from its ills.
What Is Inflation?
Inflation means that your money doesn’t go as far. Prices rise across the board for a variety of goods and services. It occurs for a variety of reasons, but the result is that your money lacks the same value as it did before inflation occurred. Inflation is a normal economic process and the federal reserve usually targets a two percent inflation rate. In instances like the current economy, inflation is occurring faster than wage growth. This means that the average person will find that it costs more to buy things than any wage increase.
How Is Inflation Measured?
Inflation is more likely to occur in a few different instances, including times of low unemployment, supply disruption or excessive government intervention. As such, if you are looking to answer the question of, “Why are prices going up,” you are likely to find the answers here.
Inflation is generally measured by tracking price increases across a variety of metrics. Inflation does not always occur smoothly, impacting the same goods and services in the same way. Instead, it typically hits different regions, services, and products differently. This is why there are a variety of metrics used to measure inflation. This includes:
- Increases in the Consumer Price Index (CPI), which measures price changes in a slew of goods and services.
- The primary CPI (CPI-U), specifically measures price changes for urban residents.
- Personal Consumption Expenditures (PCE), which measures price changes for items that are consumed. This includes items like groceries.
- Core Inflation is inflation that excludes food and energy prices.
As you can see, there are a variety of different metrics that are used to determine inflation. This allows individuals to get a more customized view of what inflation is and what specific sectors it is impacting.
Why Are Prices Going Up?
First, it is important to understand that there is no “one answer” to the question of “Why are prices going up.” An economic occurrence like inflation is almost always highly complex and multi-faceted. It is occurring for many reasons and it is occurring throughout the world. There are many reasons for the current state of inflation, including:
- Federal policy: Interest rates were already very low before the pandemic. In the aftermath of COVID-19, they were lowered even further as part of an effort to stimulate the economy and maintain job growth. That was successful: Unemployment is at record lows and seven million new jobs were created. However, low-interest rates also stimulate inflation, as it becomes easier to borrow money. As such, the federal reserve is forecasted to raise interest rates multiple times this year.
- COVID-19-related disruptions: COVID-19 brought about significant stress to the supply chain, causing labor shortages and shortages of all sorts of goods and services. Those shortages will work themselves out as the pandemic continues to abate, but for now, they are causing price increases.
- Pent-up demand: Demand for goods and services was artificially suppressed by the sudden COVID-19 pandemic. Thanks to a more robust-than-expected economy, federal stimulus and vaccines, demand for goods and services is hitting (and exceeding) pre-pandemic levels. As a result, vendors are charging more for services that were previously much cheaper.
- Full employment: The so-called “Great Resignation” has led to more and more people walking away from their jobs and leaving the employment field. Indeed, over 38 million people quit their jobs in 2021. As a result, businesses have been desperate for employees and this has boosted wages in a big way. This, in turn, has contributed to rising inflation.
It is important to realize that inflation is not just an isolated phenomenon to the United States but something that is occurring worldwide. While governmental policy unquestionably influenced the current state of inflation, it is important to recognize that it has its roots in causes that extend well beyond the borders of the United States.
What Is the Difference Between Inflation and Deflation?
Inflation is the process by which money becomes less valuable. In deflation, prices stagnate or shrink entirely, resulting in the value of the dollar increasing and allowing people to buy more with the money that they have. People on fixed incomes tend to do better during deflation.
Deflation is considered a bad thing for the economy at large. It typically means that jobs and the economy are shrinking and merchants are responding by trying to stimulate demand with lower prices. This can have a large impact on the entire economy. It can occur for a variety of reasons, including a shrinking economy, decreasing activity or technological advances that make goods and services less expensive.
How Should I Invest During Inflation?
Here’s the truth: This is an extremely difficult question to answer, as there is no set answer. Everyone has their own individualized goals, investment strategies, needs and risk tolerances. Some people may be willing to take a chance on a growth stock that is poised to take off, despite inflationary pressures. Others may be more cautious and have a shorter timeframe to make up for some potential losses. Furthermore, as noted above, not all inflation is created equal. Some inflation hits certain areas or sectors harder than others. As a result, you may not be able to make broad conclusions on your own.
There is no question that you should reevaluate your current investment strategy in light of inflation. Shifting towards more inflation-proof stocks and other financial instruments, such as real estate, may be a good move, but you also have to evaluate how these changes may impact your overall financial strategy.
In other words: Talk with the experts.
Navigating Inflation with a Financial Advisor
This is a difficult moment for investors, one that can severely complicate a variety of important financial goals. That means that you may need help and expert guidance in deciding how to invest your funds and grow your resources—even in these inflationary times. For more information on how to do just that, contact Churchill Management Group. At Churchill Management Group, we pride ourselves on building strong relationships with our clients, learning their financial goals, and providing them with the expert advice and counsel they need to be able to grow their bottom line and retire more comfortably.