Inflation is a general increase in prices and fall in the purchasing value of money. Is an uptick in inflation on the horizon? That’s the question economists and other financial experts are mulling over.
They weigh in on why inflation may increase and the potential impact on you.
What could fuel higher inflation
"The market has been signaling the risk of inflation for months," says Michael Wilkerson, author of "Stormwall: Observations on America in Peril."
He points out that the price of gold, the classic inflationary bellwether, is up by nearly a third from March lows, and the Federal Reserve’s five years forward inflation expectation rate has more than doubled, while real interest rates have gone below zero, making the U.S. dollar relatively unattractive to foreign investors.
He also says a second large pandemic stimulus package coupled with expectations for Green New Deal-like energy policies and expanded social programs — combined with not raising taxes in a weak economic environment — would soon pressure the Biden administration toward greater monetary expansion (i.e., printing money).
Eric Diton, president and managing director of The Wealth Alliance in Melville, believes the economic recovery from COVID-19 will lead to an overall increase in consumer demand, economic activity and more hiring. "One of the big causes of inflation is when the labor market gets tight, workers can ask for more benefits and raises. But I am not concerned about it turning into runaway inflation because the U.S. unemployment rate is still at 6.9%, which is historically high," he says.
Then too, trillions of dollars are being printed which increases the money supply and devalues the dollar. The list of reasons is not short. No doubt the table is set for inflation. When it takes a seat and how much it eats into the economy remains to be seen.
Prepare for an uptick
What’s the reality of inflation? Brian Cohen, an investment adviser with Landmark Wealth Management in Melville explains, "Similar to how early investing is great due to compound interest, inflation has the detrimental effect on investors and especially savers. Money today, if it sits earning nothing, or close to nothing which it gets in savings accounts, loses purchasing power year after year as inflation goes on."
Say your expenses today are at $100,000. In 10 years at 3% inflation, those same expenses now will cost almost $135,000, and in 20 years, over $180,0000. If it was 4%, those numbers go to almost $150,000 in 10 years, and almost $220,000 in 20 years.
How best to counteract the impact? "The best place to put your money is in tangible assets, such as real estate, commodities, artwork, collectibles, TIPS (Treasury inflation-protected securities), which benefit from inflation. These investments typically appreciate during inflationary periods," Diton says.
Stocks are typically a good hedge against inflation; certain ones do better than others. Diton says to consider those tied to commodities, REITs (real estate investment trusts) and precious metals, such as gold and silver.
There are investment roads you shouldn’t venture down when inflation is high. "The last thing you want to do is buy a 30-year bond that’s paying you the same income in 30 years as today. That income will be worth way less as prices rise," Diton says.
The worst thing you can do, says Cohen, "Is put your money under a mattress where you earn nothing and over time you lose purchasing power. Though most banks are paying almost zero, earn at least something in the bank. Look for online banks and credits unions that pay 0.5%, [it's] not great, but better than zero, and as interest rates rise, those should as well."
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