3 Things You Need to Know About Inflation in 2022

After staying at low levels for several decades, inflation seems to be roaring back to life. In December 2021, prices overall were 7% higher than they were the previous December. Not only that, but prices in October and November 2021 were 6% higher than in those months during 2020. 

That’s the highest inflation Americans have witnessed since the early 1980s!

START PLANNING YOUR INFLATION IMPACT & RECOVERY PLAN.

1. Inflation in 2021 Compared to 2022

What does that mean for you? First, let’s talk about what inflation is. Inflation increases the prices of goods and services – everything from beef in the supermarket and vehicles on the lots to hiring someone to mow your lawn and ordering pool supplies. 

While the prices of each of these items may vary, the U.S. government averages them in a Consumer Price Index (CPI). The CPI is often used to give the overall average.

Inflation has an impact on the pocketbook of everyone. A 7% inflation rate means that you now have to pay $1.07 for the same goods and services that could be purchased for $1.00 last year. 

That may not sound like much. But if you spend $7,000 in an average month, you now need to spend an average of $490 more just to buy roughly the same thing you did a year ago. 

Plus, the 7% figure is an average. Some items, such as used cars, have increased in price over the year at a much faster pace, roughly 37%. Home furniture has risen more than 15%.

Inflation is pretty much a constant, but the inflation rate varies. For the past several decades, inflation has risen at an average rate of 2% per year. The spike to 7% is significantly higher, which is why inflation is such a hot topic right now.

 

2. Will Inflation Continue to Rise at Record Rates?

Most experts expect inflation to moderate later in 2022. Why? Because inflation is driven by pandemic-related concerns, such as supply chain disruptions and shortages of materials used to make goods. Inflation should dampen as supply chain bottlenecks, and lack of raw materials eases.  Also, it is important to realize that the most recent monthly reports are making comparisons to 12 months ago when the pandemic influences had exerted a significant pre-vaccine slowing effect on the U.S. and global economy.  As we move further into 2022, the comparisons will be against months in 2021 that represented greater progress in the economic recovery.

However, there is no comprehensive crystal ball. Earlier in 2021, it looked as if the COVID-19 pandemic was getting under control in the U.S. and Europe. The upsurge in the Omicron variant has upended that, at least temporarily. 

The reduction in inflation depends, at least in part, on issues related to the pandemic easing, and there won’t be complete visibility on that until the pandemic eases more.

 

3. How to Combat Inflation?

As food prices increased and gas and energy prices rocketed, the United States felt the blow of inflation, especially from 2020 to December 2021. Now, and moving forward, how can you ease the impacts of inflation in Atlanta, GA? That’s a crucial question for most investors, particularly for those close to retirement.

First, you need to allocate your portfolio to combat inflation. Most portfolios are distributed among three asset classes: cash, bonds, and stocks. Cash and bonds are relatively conservative investments used in portfolios to preserve capital. 

Cash and bonds preserve capital because their prices fluctuate minimally compared to stocks, which are very volatile in price. The price of cash doesn’t fluctuate at all, making it very safe. The price of bonds fluctuates somewhat, typically inversely with the direction of interest rates. 

If interest rates rise, the price of bonds declines. Most observers expect interest rates to rise in 2022, but in minimal, small steps, which means bond price changes could also be incremental.

That said, there’s a drawback to cash and bonds for those interested in preserving their capital. The price of these assets fluctuates none or minimally. But the appreciation is currently very minimal as well. 

Interest rates on cash in certificates of deposits (CDs) are currently meager by historical standards, generally less than 1%. Interest from bonds is also at historically low levels. Both are true because interest rates have been at historic lows since the Great Recession of 2008-2009.

That means that investors in cash and bonds are currently effectively losing money because of inflation. This is true even if inflation runs at average levels of 2% per year; if you are only making 1% on invested money, you’re effectively losing 1% of your funds each year, in terms of purchasing power.

One of the reasons that the current higher inflation is such a problem is that it causes investors in cash and bonds to lose even more money, effectively due to inflation. If you are making 1% on a CD currently, the value of that money has effectively shrunk 5% over the last year because the inflation rate was 6%.

 

So, what’s the answer to investment shrinkage due to inflation? 

To keep pace with and exceed inflation, most investors allocate some of their portfolios to stocks. Over the past century, stocks have appreciated 10% per year on average — and that’s averaging in all the periodic bear markets. (A bear market is a decline of 20% or more in the major market averages.) 

Stocks are the only common asset class that has historically exceeded the pace of inflation, but stocks do have a downside. They can therefore be risky for you if you are near to a point in time when you need to withdraw a substantial percentage of your portfolio for spending purposes. A decline in stocks can mean that you won’t have the amount you were expecting to have (for spending purposes).   

A prudent allocation can manage the downside between asset classes: a portion in cash and bonds for the principal stability and income returns, with a portion in stocks for maximum appreciation, all managed in tandem with your age and goals.

Keeping your money safe is essential. Many financial advisors recommend specific sectors or types of stocks in periods of high inflation, such as dividend stocks. Reinvesting the dividends from an above-average dividend-yield stock, for example, can provide the possibility to achieve an above-inflation investment return. 

Financial advisors at Linscomb & Williams can develop a plan for your life stage, goals, investments, and the status of inflation. Talk to a financial advisor today for more advice on combatting inflation in your assets. 

 

Ready to Plan Ahead for the Rising Annual Inflations Rates? Get Started Working with a Dedicated Financial Advisor Today!

 

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MaryJane M. LeCroy, CFP®

MaryJane M. LeCroy, CFP®

As a member of our Atlanta team, MaryJane M. LeCroy is a Managing Director and Senior Wealth Advisor for Linscomb & Williams.

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Investment Advisory Services are offered by Linscomb & Williams, an SEC registered investment adviser, and a subsidiary of Cadence Bank. Linscomb & Williams (L&W) provides financial planning, investment management, and retirement plan and investment consulting services. L&W is not an accounting firm, and does not provide tax, legal or accounting advice.

Information expressed herein is based upon opinions and views of L&W and information obtained from third-party sources that Linscomb & Williams believes to be reliable, but Linscomb & Williams makes no representation or warranty with respect to the accuracy or completeness of such information. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.