The potential impact of 2022 inflation on your financial goals
When millionaires are concerned with inflation, it’s time to pay attention.
According to the 2022 CNBC Millionaire Survey, inflation is the number one economic fear among millionaires.1 While low- and middle-class individuals feel the strain at the grocery store and gas pump, the wealthy and affluent feel stress largely centered around how increased consumer costs domino and affect their overall financial wellness.
Inflation is the general increase in prices and fall in the purchasing value of money.
Inflation is currently tracking at 8.6%, the highest it’s been since the 80s.2
On one hand, inflation is a normal outcome of our economy: It means goods and services are being produced at a growing rate and consumers are buying them in increasing amounts, too. A low, steady rate of inflation, around 2% annually is healthy, experts say.3
However, when inflation increases more rapidly—four times as rapidly in this case—consumers and the economy can start to suffer.
The 2022 inflation is largely caused by the lasting supply chain issues triggered by COVID. Products and commodities such as computer chips, aluminum, food, plastic, and building materials are still in short supply, leading to slower production of consumer goods and higher prices on the reduced supply.
Additionally, more money is circulating due to relief packages and higher wages caused by a tight labor market. Russia’s invasion of Ukraine is putting further strain on the global oil supply, leading to a hike in gas prices.
We have been facing many of the preceding factors of a recession: The cost of goods is increasing sharply and wages can’t keep up, so people may stop purchasing at a normal rate and production will slow. As of July 2022, we have experienced two quarters of shrinking gross domestic product (GDP)—the widely acknowledged yet unofficial definition of recession. However, we’re still waiting on an official announcement from the Business Cycle Dating Committee, which may take months or years of deliberation.
In the United States, the economy isn’t broadly and officially considered to be in a recession until a group of eight economists says so. This group is called the Business Cycle Dating Committee, and they work under the umbrella of the National Bureau of Economic Research (NBER), a private nonprofit organization.
Still, even recessions are a normal part of the business cycle, says North Star Investment Consultant Steven Vacinek, CIMA.
Even though prices and interest rates are drastic, your response doesn’t need to be. As long as you stay mindful of your finances, you can stay the course of financial security.
Evaluating your spending through inflation
With the cost of essential goods rising, many are growing concerned with their monthly spending.
Even when you are can easily cover your basic living expenses (home, food, fuel), the creeping costs of your essential and discretionary spending can begin to impact your short-, medium-, and long-term goals.
For example, if you typically contribute 15% to retirement, donate 10% to your favorite charity, and spend the remaining on 75% on living expenses, a 9% increase on lifestyle could affect those target saving and giving percentages, significantly impacting the rest of your financial strategy.
EXAMPLE: After taxes, you take-home $17,117 each month. Now, $2,567 goes to retirement, $1,711 to charity, and $3,000 to your mortgage. You have $9,839 to use on living expenses. Only, with inflation, what you used to buy for $9,839 costs $10,685.
So, which category is the $846 difference coming from?
Example based on a $300,000 gross income for a couple filing jointly with two kids.
Take-Home-Paycheck Calculator. Calculator.net. (n.d.). Retrieved July 12, 2022, from https://www.calculator.net/take-home-pay-calculator.html
Keep in mind that, although inflation will return to moderate levels, prices aren’t expected to return to pre-pandemic levels.4 Spending is just another area where we may need to adjust to a “new normal.”
Likewise, when inflation is high, lenders will demand higher interest rates as compensation for the decrease in purchasing power of the money they are paid in the future. Higher interest rates increase the cost of borrowing and can put pressure on asset value.
You may choose to reconsider some of your larger planned purchases. Perhaps buying a bigger home for your growing family or the lake house for retirement will go on hold until high interest rates balance themselves out.
Your financial professional can help you review the last few months of transactions to see where you may need to cut back spending or temporarily adjust your investments.
Is your family and income protected?
Cash flow for increasing living expenses may cause you to evaluate your emergency plan.
Along with an appropriate and accessible emergency fund, life insurance and disability insurance can help safeguard your and your loved ones’ future and lifestyle, especially in times of economic uncertainty.
Investing with inflation at a high
If inflation causes your money to lose value over time, how do you ever increase wealth? Especially when the average annual raise in the U.S. is just 3.5%,5 which this year won’t beat inflation.
This is why we invest.
In the last 10 years, the average rate of return in the S&P 500 beat the average rate of inflation by over 11%.8 Meaning, if you invested $100 in the markets in 2011, you would have $371 in 2022.6 That $371 may not buy as much in 2022 as it did in 2011 because of inflation, but it’s better than the $100 you started with!
Keep in mind, the stock market doesn’t beat inflation every single year. Some years, the market dips far below that of inflation. However, given enough time, the peaks and valleys average out, and investing well pays off.
10-year inflation rate 2011-20217
10-year S&P 500 rate of return 2011-20218
average inflation rate since 19807
average S&P 500 rate of return since 19808
What if you don’t have 40 years to wait for things to balance themselves out before you retire? You don’t even have 10 years?
Time horizon is one of the most important factors in wise investing, and a seasoned investment manager can coordinate your goals and the current inflation reality to help you work toward a better sense of security.
For those looking to use their invested assets soon, talking to your financial professional is imperative for creating an investment and distribution strategy that is sustainable and accounts for variables in both inflation and the markets.
Are your invested assets properly allocated?
A properly diversified portfolio helps temper the impact of volatile market swings through accounts that meet your needs today while putting you on the path to achieving your future goals.
When it comes to volatility and uncertainty, the ongoing advice is to be intentional but not reactionary. Your financial and life goals are your goals at 1% inflation or 8.6%.
Yes, movements in the markets and the economy affect your income, your spending, and your investments. However, a sound financial strategy will account for these periods at its inception, then adapt as changes occur. It does not make sweeping changes based on headlines or go all-in or all-out according to hearsay.
Your financial professional should embody a spirit of calm confidence in periods like this. When you meet with them, except them to listen and empathize with your concerns, then quiet the noise to help you develop an approach to your spending and investing you are comfortable with.
If you need a reliable sounding board for your financial worries and source for sound guidance during this time, you can connect with a financial professional who shares your values.
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1Frank, R. (2022, June 15). Millionaires are raising cash on fears that the Fed can’t tame inflation and stave off recession. CNBC. Retrieved July 25, 2022, from https://www.cnbc.com/2022/06/15/millionaire-fear-fed-cant-tame-inflation-and-stave-off-recession.html
2Consumer price index data from 1913 to 2022: US inflation calculator. US Inflation Calculator. (2022, June 29). Retrieved July 8, 2022, from https://www.usinflationcalculator.com/inflation/consumer-price-index-and-annual-percent-changes-from-1913-to-2008/
3Lewis, Ramsey. “What is inflation? Why the cost of goods rise over time and what it means for the value of your money.” Business Insider, November 11, 2021.
4Choe, Stan; Bussewitz, Cathy. “Inflation is painfully high, but some relief may be coming.” Star Tribune, December 12, 2021.
5Mercer. (n.d.). Compensation is going up. but, is it enough? Retrieved July 12, 2022, from https://www.mercer.us/our-thinking/career/compensation-is-going-up-but-is-it-enough.html
6S&P 500: $100 in 2011 → $371.04 in 2022. S&P 500 Returns since 2011. (n.d.). Retrieved July 11, 2022, from https://www.officialdata.org/us/stocks/s-p-500/2011?amount=100&endYear=2022
7International Monetary Fund, World Bank and OECD Inflation CPI indicator
8Macrotrends. (n.d.). S&P 500 Index – 90-Year Historical Chart. Macrotrends. Retrieved July 11, 2022, from https://www.macrotrends.net/2324/sp-500-historical-chart-data
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