Rising Inflation
July 28th, 2021
You may be hearing a lot about rising inflation and have noticed a price increase in food, gasoline, auto, and housing prices. Is this a long-term trend or a temporary short-term trend? Before we can answer these questions, we should define what inflation is, as well as what the Fed is.
So, what does inflation mean and how does it affect your finances?
Inflation is a decline in buying power. If you normally pay $4.00 for ice cream and now that same ice cream is $5.00, this is an example of inflation. When the things you buy increase in cost, medical care, a car, housing, this is inflation.
And what is the Fed and what do they do?
The Federal Reserve monitors risks to the financial system and works, usually with agencies at home and abroad, to help ensure the system supports a healthy economy for U.S. households, communities, and businesses. Overall, a little inflation can be a good thing when it is within the Fed’s target of approximately 2%. The fact is, different segments of our economy increase prices at different rates, as cable/internet, college tuition, housing, and medical continue to increase over 5% annually.
Many well-known economists believe the inflation we are seeing is a short-term increase.
Below are some recent comments from Julia Coronado, founder of the research firm MacroPolicy Perspectives:
“We are at peak heat… We know we’ll get a fade — the question is, how big is the fade?”
“Ms. Coronado, like many economists, expects inflation to settle down and remain in line with the Federal Reserve’s 2 percent average goal over time. The Fed uses a different index, the Personal Consumption Expenditures measure, as it aims for 2 percent average inflation. That gauge is closely linked to C.P.I., though it tends to run slightly below it.” (NY Times, June 10, 2021)
“That said, many of the forces that have kept a lid on inflation for more than a decade remain in place, including technological innovation, globalization and increased productivity.” (USA Today, June 13,2021)
Since some people have saved over the last year and have forgone buying a used or new car coupled with a computer chip shortage that has caused a bottleneck for car production, it has caused a dramatic increase in used car pricing and a shortage of new cars. Is this a permanent situation? No, not at all. Most likely, in about a year, as chip production catches up to demand, prices on used and new cars will decline.
Now I know autos are only one segment of our economy and are not something people buy daily, usually once every five to ten years. What about food? Some food items like coffee could be more expensive as demand outstrips supply, is this a longer- term trend? In some areas of the economy it remains to be seen if this is a commodity increase due to bad weather, crop shortages, and or increase in demand in that particular product.
So, what can you do, if you are in the market for a car? Perhaps you can hold off for a while. We see with some larger purchases, such as autos or homes, we may have to delay buying and find a substitute (fixing the car we have or buying an older used car). For a home, that could mean moving to a more affordable area.