When it comes to inflation, everything old is new again

By Morf Morford

Tacoma Daily Index

Inflation is a curious economic condition.

Few, if any, understand its direct, specific causes, no one fully comprehends its impacts and no credible financial advisor fully grasps how – or when – it will end.

Inflation has multiple causes.

Every manifestation of inflation – especially the one we happen to be in – divides economists into two camps.

Some are convinced that this particular round of inflation is a passing issue that will dissipate as ports work through the backlog of containers at their docks and vaccines allow people to return safely to work.

Others are convinced that this is a longer-term problem society hard-wired into our economic system.

Either way, the underlying issue of scarcity is affecting our immediate budgets, day-to-day lives, and driving up the prices of material goods and basic services.

You might think of inflation, or any economic trend, as being like some kind of gravitational force field, or like a tide that rushes in and then recedes, impacting everything it touches.

Every aspect of the economy responds differently. Some prices go up dramatically and drop – sometimes suddenly.

Other prices rise – and never retreat.

Long held economic principles, like the power of supply and demand, express themselves with a vengeance. Or become irrelevant under unprecedented circumstances.

What works?

There’s an enduring principle about raising children – do what works.

What works with one child, in one situation will probably not work in with another.

What works with one child might enrage or paralyze another.

That’s why I’ve always been more than a little sceptical about “best practices”.

What may be a good financial strategy today just might be economic suicide next week.

Eras of inflation are ideal times to step out and make that investment or finally start that business you’ve dreamed of.

And times of inflation might be the ultimate time to “duck and cover” and wait for the wave to pass.

Inflation eras are the ultimate stress test to see how much you can withstand just to survive.

But they are also times of unequalled opportunity.

In times like these, you find out who your friends and allies really are. Large companies that invest in and revive local economies can just as quickly abandon struggling economies.

During unpredictable times like these, your best strategy may be to shop local.

Your neighborhood store or company had roots in the history of the place, and, if you support them in difficult times, will be there long after the big box stores have moved to more profitable markets.

What counts?

You may also want to ask (or find) a financial professional to see how current inflation may impact your long-term financial plans.

While inflation has been largely unknown in the US since the early 1980s, a conscientious financial planner will calculate an assumed inflation rate based on historic data.

If you look over the history of almost any market, one principle holds true – values go up, then down, then up again, and then…

Prices, values and markets flux continually. Nothing stands still for long.

Most of us, especially those under 45 or so, have been blind-sided by inflation. How could they not be? Over the last 50 years, the average annual rate of inflation has been a mere 3.79 percent.

For most of us, except for housing, a small but steady rise in costs parallels a rise in our incomes and career moves. Until it doesn’t.

For many, what had been a slowly rising obstacle becomes an impassible wall.

Few of us are accustomed to everyday consumer goods like food rising in price so rapidly.

Historically inflation has always played a role in the economy.

Healthcare and college costs, for example, have experienced dramatic – if not explosive – inflation over the past 25 years.

The cost of a cars have been driven up by a supply shortage, which itself may be driven by a shortage of microchips.

These industry specific mini-shortages lead to mini-inflations that can add up to impact your budget and cost of living, and eventually, your retirement plans.

The inflation era of the early 1980s led to rewriting of tax and banking laws. Stay tuned for a similar move now. Those changes are not always to our benefit.

Which way to retirement?

An alarming number of Americans have essentially nothing set aside for retirement.

A recent study from Northwestern Mutual showed that 22% of Americans have saved $5,000 or less for retirement – and 15% have saved nothing at all.

And it’s not just young people with almost nothing saved.

Around 17% of baby boomers and 21% of Gen-Xers have no more than $5,000 in retirement accounts, and barely over 20% of people in both of these demographic groups have less than $5,000 in personal savings. To put it mildly, approaching middle age with only $5,000 saved is a disaster, and reaching your 60s with such a small amount is a financial catastrophe. $5,000, in most instances, could easily evaporate in one month.

Social Security is intended to be a survival resource – but for too many it is their only income source. The average benefit was just $1,503 in 2020, so if your benefit is in line with the average, it will give you just $18,036 in annual income. As you might guess, most retirees need substantially more than that to get by.

Because of its longevity, Social Security is pegged to predictable, historic inflation rates.

As a result of the inflationary pressures between 1969 and 1974 (the average annual rate of inflation doubled to 12% in that five-year period), Congress included an automatic Cost-of-Living Adjustment (COLA) stipulation, within the 1972 Social Security Amendments.

These amendments, in theory at least, protect the buying power of retirees’ Social Security income.

The first COLA adjustment began in 1975 and was an 8% increase over the prior year.

The Social Security Administration indicated that, based on the recent rise of certain consumer goods pricing, the 2021 COLA will be 5.9%, which is the highest COLA increase since 1982.

To put that in perspective, there have only been three years in the last 12 in which inflation was low enough that no COLA increase was necessary.

In other words, to survive the daily assaults of inflation, and even more important, come out of it on the other side, takes some planning and probably some professional expertise.

It can be done, but the near-gravitational pull will exert its will on every aspect of our economic lives.

In these crazy and unpredictable times, tread carefully and find something solid to hang on to.