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Inflation is it real?

Inflation is it real?

January 14, 2022

Category: The economy

The Answer: Inflation

The Question: What is the word that has been googled more in the United States this year than in any year since 2004? 1

If you aren’t thinking about how inflation might impact your life, then your planning process may not be as effective as it should be. Inflation is tough to predict. Economists get it wrong all of the time. We certainly don’t have a crystal ball when it comes to predicting variables that impact the economy. But we do know that inflation is a risk. In fact, inflation typically presents the greatest risk to retirees as they are completely responsible for making sure their investments and other income sources keep pace with inflation.

Inflation simply represents the increase in prices for products and services that you buy. Inflation is real, and it matters because it can adversely impact your standard of living. Over the past couple of decades, we have been living in a world of low inflation. This year, inflation is running at levels that we haven’t seen in decades 2. Everyone is wondering the same thing: is inflation temporary, or do we need to hunker down and plan on dealing with high inflation for years to come?

I once heard that inflation is like crabgrass. You may not notice a little crabgrass here or there in your yard, but if you don’t pay attention, your yard will eventually be full of crabgrass and it will be hard to get rid of. Similarly, if you don’t pay attention to a little inflation in your financial planning, it may significantly impact your standard of living down the road. With that in mind, let’s talk about what you should be doing now.

First, don’t panic and overreact. We don’t yet know what the future inflationary environment will look like. The financial media and peddlers of financial products (you’ve heard their ads on tv and radio) want to scare you in order to sell something to you. Ignore them. They’re not on your side.

Second, analyze the numbers to see what level of inflation would make your financial plan fail. Financial models are extremely sensitive to inflation, meaning that it doesn’t take a lot of inflation for us to advise a client to lower their family spending. You need to know the impact on your specific situation to determine what action, if any, needs to be taken.

Third, know what you can control and what you can’t. How much your family spends and how you structure and manage your investments are totally in your control. The amount of taxes you pay may partially be in your control. The financial markets and the actual rate of inflation are not in your control.

Fourth, develop a plan to hedge the risk of inflation. Focus on what you can control. Depending on inflation’s impact to your planning, you may need to reduce your spending. You may need to substitute spending patterns. For example, eating hamburger instead of steak, vacationing to Florida instead of Europe, buying a lower priced car than you would like, you get the idea. With regard to your investments, you will want to add different types of investments that historically have performed well during periods of inflation. There are several. Understand what they are and what causes them to do well when inflation rears its ugly head.

Finally, don’t go all in on one type of investment. It’s just too risky. Whether it’s gold, silver, real estate, or anything else you are hearing about in the media, you want to be careful not to put all of your hedging eggs in one basket. Sure, if you are right, you’ll have a big smile on your face. But if you’re wrong, it may impact your spending forever. Three of the primary tenants of risk management are diversify, diversify, and diversify. Once you determine what types of investments are suitable, diversify by adding several types to your portfolio.

Please reach out to us if you would like a complimentary assessment of your personal inflation risk.


1 Source: Google Trends United States January 1, 2004 compared to May 2021.

2 Source: Minneapolis Fed

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  Historical performance is no guarantee of future results. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. No strategy assures success or protects against loss.