What is Going on with Inflation?

These days everyone seems to be asking, or at least it feels that way – “Should I be worried about inflation?”

Is inflation transitory? Is it here to stay? So what is the big deal? Why is everybody talking about inflation, other than it is one of the top three or four headlines in the news these days?

Well, inflation is important, and we feel it rearing its head as we begin to take notice of it.

We are used to it being like a silent, odorless, colorless, tasteless gas that exists out there. Typically, we don’t even pay attention to it. But now it’s creeping in, and suddenly we realize that things cost more. So let’s take a moment to get some perspective around inflation.

What is Inflation?

Technically, the definition of inflation is a decrease in the purchasing power of a dollar, which is financial speak for things get more expensive and quickly.

There is a target and appropriate level for products and services to get more expensive over time. As this happens, it helps keep the economy moving because, of course, consumers want to buy now as these products and services will likely become more expensive later.

But the question becomes – is it a problem? Here are a few thoughts around whether or not it is indeed an issue.

Watch the video to more about inflation and whether you should be concerned about it or keep reading:

3 Things to Know About Inflation

1. Inflation is Hard to Predict

Even if you had a crystal ball back in 2019 and knew what would happen in 2021 with COVID-19 or in 2020 with the election, you don’t know what will happen with the stock market, the bond market, or inflation, for that matter. It is difficult to predict, and guessing will drive you nuts, so it feels like a little bit of a fool’s game for the media coverage this topic receives.

There’s not much use in trying to forecast whether inflation will end in December 2021 or the following year; the truth is no one really knows.

Now, granted, it is the Federal Reserve’s job to keep an eye on this. There are intelligent and savvy people who sit on the Board of Governors of the Federal Reserve who control the interest rates and things like that, but even they don’t know exactly what will happen.

They do know they can help influence interest rates, and you may see them tapering and raising short-term rates and using other tools too complicated to explain in this blog. However, the fact is that inflation is flat-out unpredictable.

2. Metrics in Finance are Volatile

It is often understood that volatility is a normal thing in the stock market that can give long-term rewards to patient investors. So, it is no surprise that many of us prefer volatility in the stock market - and on roller coasters - when they are going up and tend not to enjoy volatility when it is going down.

But as the saying goes, you cannot have your cake and eat it too – you cannot like the volatility when the wind is in your favor and then complain about it when the wind blows against you. And, so it is with inflation, we tend to be fine and happy with inflation as long as we don’t notice it, but as soon as it tends to spike in a year, then it’s like – what is going on!

Remember, the Federal Reserve has a long-term target of trying to keep inflation around 2%, and for 2021 it seems like it will come in at over 5%.

Is that a huge problem?

The most recent rise in inflation rates began in April 2021. During the first quarter of 2021, it wasn’t a topic that made the news during the morning drive. The long-term inflation rate is just a whisker over 2% when looking back a decade or even two decades, even factoring in this recent spike.

How long will it last?

I don’t know, and neither does anyone else, but historically speaking, not too long. While it might be tempting to prepare for the long haul, inflation comes and goes and will be well on its way out before we know it.

3. Even if You Knew When Inflation Was Ending, What Would You Do?

At the beginning of 2020, if someone had told you there was a global pandemic coming that would shut down businesses and the entire economy for a month or three...

What would you have done? Probably the wrong thing.

You may have concluded you should get your money out of investments and into your bank account that has FDIC insurance, but you would have missed out on what turned out to be a 20% rise in equity markets in the United States.

Even if you knew what was going to happen with inflation, it doesn’t tell you precisely whether now is the right time to start that renovation on your house, buy a car, or book a vacation. It is critical to remember that markets don’t follow headlines. In fact, headlines aren’t really a reliable gauge for financial decisions at all, which is just one reason why a plan, patience, and perspective are your best friends when trying to layout long-term financial goals.

More Questions?

If you have more questions about inflation, 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!

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