Inflation isn't going away right now. In fact, prices have been increasing at their fastest rate since the beginning of the 1980s.
There is evidence of uneasiness in the world, as shown in the stock markets. Stock markets don't like uncertainty, and there's plenty of that around, whether it's inflation, midterm elections, or the geopolitical risk in Europe right now. And markets are doing what markets always do when things are unclear, uncertain, and unknown, and that is - they are volatile.
One of the areas our team continues to get a lot of questions on from you is - inflation. And while I recorded some thoughts on this a couple of months ago, it's definitely time to update those based on what we now know. And we know that inflation is ugly. A couple of months ago, we wondered if inflation would come in around 5 to 6%. We're now seeing the numbers roll in on the year-over-year inflation about 8%.
And there's certainly a reasonable expectation that it could end up in the 9 to 10 percent range by the time 2022 is over. As you well know, nine to ten percent is the highest inflation rate in the last four decades and certainly the highest inflation that any of us have experienced during our lives. Since annual inflation in the previous two decades has struggled to touch even 2% since the beginning of the century. And yet here we are with a year-over-year rise in prices of 8% and moving northward. It should be no surprise that there is a lot of uncertainty, even among you and me, on what will happen and how this impacts us.
Watch the video to learn more about the latest with inflation and how to focus on what is in your control, like managing your economy instead of the economy - or keep reading:
It is challenging to know what to do with so much uneasiness in the world. Instead of figuring out how to control things that are out of your control, it makes better sense to focus on what is within your control. Managing your economy is more effective than stressing about the economy. Four ideas that are explored in detail below include:
I will say that the poster child for inflation that we all can connect with is - gas prices. They've been rising over the last couple of months. Indeed, that's accelerated a lot with Russia's invasion of Ukraine. And it is the place where daily we're reminded that things are getting more expensive and rapidly. Now, candidly, I'm not entirely sure if the price of gasoline is all that different from the cost of a gallon of milk, a pair of blue jeans, or an appetizer before dinner. It's just that none of those things come with a huge sign on the street corner in 1-million point font that advertises the price on an hourly basis. If they did, we might get more concerned about inflation with milk or its price moving by a penny or a dime or a nickel on an hourly basis. But in any case, this is what happens with gasoline. And so, we're very aware when we hear the news reports of inflation that, yes, this feels real because I just filled up and it cost me $80 or $100.
One of the concepts that we often talk about in times of uncertainty is focusing not on the economy over which you and I have no control but on your economy over which you have a lot of power. So, while you cannot single-handedly influence elections, inflation, or interest rates, you can change how you use your money and the choices you make with it.
The first one you've probably already undertaken is to engage in fixed-rate debt. For example, if you have refinanced your mortgage in the last couple of years to something in the 2% range, you have already made a decision, which is a hedge against inflation. You have locked in the cost of debt over a long-term basis. And so, with a mortgage payment set at a low-interest rate, say of $3,000 a month, the dollars you are using to pay that fixed cost month after month after month in an inflationary environment are being devalued. In a very real way, the cost of that mortgage might be $3,000 worth of dollars today, but with inflation's impact, it may be $2,900 or $2,900 worth of dollars a year from now. So, fixed-rate debt is a hedge against inflation.
And you didn't think you knew a lot about economics, but this is one of the great things that can be done to hedge against inflation. So, if you have a fixed rate down on your house or a car loan at a low rate over four or five, six, seven years, that is a hedge against inflation. If you've refinanced student loans to a nice low rate over the next four to seven years, then that is a hedge against inflation because that debt cost won't change, while the value of the dollars used to repay it does change.
Now the second thing that you can do to hedge your economy against inflation is what's known as the substitution effect. The substitution effect is simply where you choose to substitute a lower-cost item or in lieu of a higher-cost item.
For instance, if you go to the drugstore and would typically purchase a name-brand cold medicine, but instead buy the generic because that's two dollars more than it used to be. That's an example of the substitution effect. If going out to eat, you would normally end up with appetizers, salad, entrees, maybe a bottle of wine, or some dessert. But instead, you decide, let's not get that entree; let's substitute the chicken. That is another example of the substitution effect. Every day, we all make decisions to ensure the cost of the goods that we purchase fits the dollars available in our wallets or in our checking accounts.
The third concept to consider in terms of inflation is to manage lifestyle creep. In times of low inflation and high wages, it's nice to see our lifestyles become more comfortable as we travel and perhaps upgrade airfare or go out to eat and add an extra bottle of wine or buy a designer handbag or accessory. When inflation is high, we can help manage that impact on our lives by controlling our lifestyle creep. And so perhaps we don't upgrade our airfare, or we don't replace our handbag, or we order the house wine instead of the label that we prefer. That's an area where we can manage our lifestyle creep and the impact of inflationary pressures.
And finally, an area that seldom gets talked about, at least in my reading, is to look at your own wages and income. Again, we rarely talk about increasing your income as a hedge against inflation, but that's precisely what it is, and there hasn't been a better time in history that I'm aware of to ask for a raise. We have a ton of employers looking for employees, a record number of job openings available, and an extraordinarily small pool of people open to taking those jobs. So, this recipe is ripe for American workers to request, demand, or ask for higher wages. It may be an excellent opportunity for you to talk with your boss or your clients if you're an entrepreneur and explain that based on what's going on, we need to increase our fees or talk about a higher salary or bonus structure. The market is right for that, and increasing your income and compensation is one of the most direct forms of hedging inflation.
We'll be back soon with more thoughts on everything going on around us. If you have more questions about inflation, focusing on your economy, financial planning, or your financial future, please connect with our team of advisors at Spaugh Dameron Tenny. We understand every individual comes with a unique financial background, challenges, needs, and goals, and we're here to help you along the way!
Shane Tenny is the managing partner of Spaugh Dameron Tenny. Along with hosting the Prosperous Doc® podcast, Shane has a true passion for behavioral finance, helping clients and audiences understand how to develop successful strategies based on their unique temperaments. An accomplished and highly engaging speaker, Shane is regularly interviewed for television and podcasts, is actively involved in the Financial Planning Association®, and contributes to industry advisory boards.
For over 50 years, Spaugh Dameron Tenny has provided comprehensive financial planning for physicians and dentists across the U.S. In addition to providing personalized advice, we walk our clients through their options to help maximize finances and maintain financial security.
Securities, investment advisory and financial planning services offered through qualified Registered Representatives of MML Investors Services, LLC. Member SIPC. Supervisory office: 4350 Congress Street, Suite 300, Charlotte, NC 28209, (704) 557-9600. Spaugh Dameron Tenny is not a subsidiary or affiliate of MML Investors Services, LLC or its affiliated companies.→ Check the background of your financial professional on FINRA'S Broker check