June 1, 2021
In recent days there have been an increasing number of reports and warnings regarding rising inflation and this week it hit a 13-year high. Although there is debate over whether there this will just be short term volatility, some are already comparing the current scenario to potentially being a replay of the 1970’s ‘Great Inflation’ episode. Additionally, a recent Forbes story warned that “…inflation will accelerate in 2021 and 2022.”
With so many signs pointing to the acceleration of inflation as the economy reopens, let’s start by taking a look at the effect it’s having on prices.
One of the most obvious signs of rising inflation is gas prices, though they had some help last week from the hack and subsequent shutdown of the Colonial Pipeline. The system has resumed normal operations which may help ease the price at the pump; however, the trend had already been up. According to price-tracker GasBuddy, the average price per gallon of gas in the US jumped to nearly $3.04, up more than 7 cents from the previous week and skyrocketed 9.1% from the previous month. This was the highest price for gasoline in six years, and an analyst there stated that for the most part, the rise in prices reflected the reopening of the economy.
Grocery prices are also on the rise and that trend is likely to continue for at least the rest of the year according to NBC News. They cited a recent monthly consumer index report which showed the largest one-month increase in the price of groceries in nearly a decade.
Home prices around the country also continue to rise as inventory remains in short supply. The median home price in April rose 20 percent to $347,500 compared with a year ago, and the average home spent just 20 days on the market before selling, according to data released Friday to real estate listing website Redfin. With prices rising across the board, it may be a good idea to prepare for a bumpy ride for the rest of the year and maybe longer.
Higher prices are caused by inflationary pressure, lack of supply and increased production costs. The Bloomberg Agriculture Spot Index, saw prices spike at the end of April hitting their highest level in nine years. Higher prices for bread and meat were caused in large part by inflationary pressure and lack of supply. Prices of autos are also increasing due to a global semiconductor shortage cutting into new car production and causing reduced supply. The same article stated that furniture prices are also up 7.8% during the last year due to a lumbar shortage.
Shore Up on Investments
According to Forbes Advisor, stocks have fallen in recent days as money managers worry that higher-than-expected prices will force the Fed’s hand to stop its massive QE bond purchase program and eventually raise interest rates earlier than planned. With stock prices near all-time highs, volatility is to be expected, so now might be a good time to brace your investments for the impact of inflation. During these times, it’s often a good idea to keep any cash-type investments in money market funds or a high-interest cash account. A rule of thumb is to keep your maturities short, so you have the ability to reinvest at higher rates as inflation begins to level off.
Add to Your Savings
Having an emergency savings fund is particularly important during times of economic uncertainty. Although it can be tough to save money during times of rising inflation, current homeowners may have a viable option to be able to access some cash. One idea is by using the existing equity in your home to do a cash-out refinance while rates are still near historic lows. In this scenario, you refinance your existing mortgage into a new one for a larger amount and pocket the difference, less any closing costs. Keep in mind that with this option you will be taking on a new loan with new terms which could extend the length of your mortgage. However, the flexibility of a cash-out refinance’s lump sum lets you choose how you want to utilize your money.
Who Benefits from Inflation?
Homebuyers can also benefit during inflation. Housing price increases of 1 to 2 percent due to inflation would be a completely different scenario from the 2007/2008 housing market crash. Whether or not housing price increases will increase by the same percentage that they did between 2002 and 2008 remains to be seen. However, an investment in a new home while rates are still near historic lows - even during times of inflation – will likely “pay dividends” over the long haul.