For years, the Fed took measured steps to successfully control inflation. Then the pandemic struck, causing a global economic crisis. As economies reopened, inflation spiked to levels not seen in 13 years. This dramatic increase has been due to a surge in spending at a time of massive disruptions in the global supply chain and labor shortages caused by the pandemic. Over the past year, we’ve seen the Consumer Price Index increase to 5.3%, up from 1.3% last year at this time. Wages have risen but not enough to keep up with this rate of inflation. According to the most recent data from the Bureau of Labor and Statistics (June 2021), wages increased 3.2% for the past 12 months, creating a gap of over 2% in purchasing power.[1] The question is, is the higher inflation rate temporary or is it the trend going forward? Many economists, including Federal Reserve Chairman, Jerome Powell, expect inflation to come back down to a more reasonable rate of approximately 2.2% in 2022 as the economy normalizes.[2]
Even if inflation does come back down, a 2% to 3% rate slowly eats away at purchasing power and has a detrimental effect on a budget. This becomes particularly problematic for retirees living on a fixed budget. While the Social Security cost of living adjustment (COLA) is expected to be near 6% in 2022, it has not historically kept pace with average increases in living expenses. Since 2000, Social Security’s COLA has increased by 55% while expenses for older people have increased by nearly 105%. Within that time period, there have been significant increases in gasoline and home heating oil prices and food prices. Healthcare costs have risen dramatically; prescription drug prices alone have increased 272% since 2000[3]. Since seniors tend to need more healthcare in their later years, it becomes an even bigger portion of their budget. Sharply increasing property taxes and housing prices in many areas around the country can also put a strain on cash flow.
You may not be able to control inflation but there are ways to lower the impact a rising rate has on your spending power. A good place to start is by putting a financial plan in place. A financial plan can help determine if you are on track to achieve your long-term goals, such as maintaining your current level of spending in retirement. Not only does a financial plan take into account income, savings and expenses, it also builds in an estimate for inflation. If you are not on track, a plan can help you figure out what you can do to improve the outcome, such as saving more, paying down debt, or downsizing your home in retirement.
Not being too conservative with investments in retirement is also important in keeping up with inflation. Depending on your risk tolerance and time of life, it is important to have your portfolio invested in an appropriate mix of equities to benefit from market growth and fixed income to maintain some stability during volatile cycles.
Please contact us if you have questions about how inflation affects your financial situation.
~Karen Didde
[1] https://www.bls.gov/news.release/cpi.nr0.htm
[2] https://www.npr.org/2021/09/22/1039317128/federal-reserve-inflation-economy-taper-interest-rates
[3] Thinkadvisor.com, 10 Fastest-Rising Costs for Older Americans Since 2000, Ginger Szala, October 5, 2021.