Updated: Jul 15, 2021
Consumer prices in June 2021 jumped the biggest gain since almost 13 years ago in August 2008, during the last recession. Today, I will be briefly going over the Inflation News, as well as what this means for you and what you can do about it.
What's Going On With Inflation?
June 2021 has been a tough month with inflation climbing higher than expected of 0.9%, compared to the estimate of 0.5% - that is almost TWICE the forecast. If you want to have a comparison, the average annual inflation in 2020 was 1.4% and 2019 was 2.3%. The inflation rate for June alone is 5.4%, which is double the amount from just three months ago in March when it was 2.6%. It has been the 6th month in a row where inflation numbers have come up much higher than expected. and depending on how this year plays out, inflation can further increase. We are up 4% from the beginning of 2021 and if we are to continue at this rate, some experts estimate that we will have more than 7% by the end of the year!
You can also see based on historical inflation rates, the last time inflation was in the 5% range was in 2008. Does this mean there will be a recession coming? Keep on reading to find out how the inflation is affecting the economy.
The areas affected the most in consumer spending are food, energy, and used vehicles. In fact, used car and truck prices made up about one-third of the increasr attributed to the total Consumer Price Index or CPI. Even removing food and energy, the core CPI rose 4.5%, which is a massive increase, last seen in September 1991 - that's even before I was born!
We were told by the Feds that this is just a "transitory stage" with the markets slowly opening back up from the Pandemic. However, what this shows is that inflation is a bigger problem than originally anticpated and is expected to stick around for a longer period.
With everything going on, there is also talks of a looming recession. With the Government printing trillions of dollar to put a bandage over the financial disaster that could have happened with the Pandemic, one can say inflation is unavoidable. The Government is also out of their monetary policy tools since with inflation, they would usually increase the interest rates to curb it. However, with the economy teetering on a fine line, increase in interest rates anytime soon with collapse the market. It will definitely be interesting to see how the Government handles the upcoming months.
So What Does This Mean For You?
Now that I've given you what's going on, let me break it down what it means for you.
You have less purchasing power. Wages & salaries not going to go up at the same rate as inflation, which means that your money can purchase less things for the same price. I don't know if you noticed, but I was able to directly experience the increase in grocery bills. And for those driving, the gas price has also gone up significantly compared to just a few months ago.
Traveling and going abroad on the dollar is going to become that much more expensive. With inflation follows decrease in the value of a dollar over time, and converted it to other foreign currencies, you will find everything from hotels to and rental cars a lot more pricey that you last remember. With the prices going up due to demand after restrictions become more relaxed and people wanting to travel - the gap between the weakening dollar and higher prices due to demand will have you thinking that travel is a lot more expensive and something you can't afford anymore.
Housing accounts for 60% of CPI and with house prices skyrocketing, it could mean that if you are a renter, your rent might increase in the near future.
There could be a temporary drop in the markets. With the news of the inflation increase, you may have noticed some drops in the stock market. The companies are working on how to get back on their two feets with supply chains and increasing expenses. Ultimately, the cost gets pushed down to the consumers through price increases or cost cutting such as consumers getting less for the same amount. For example, you may be buying cereal with less cereal but in the same box size. This ultimately increases how much consumers buy since you will have to run out more frequently to buy cereal.
What You Can Do About Inflation
Warren Buffet had sounded the alarn on inflation a few months ago, and had given some tips on how you can be ready.
Invest in yourself The biggest issue with inflation is that you have less purchasing power. One way to beat this is for you tp increase your earning power by getting a higher paying job than you have now. If you are currently not working or have reduced hours, take this time to develop your skills. Another way to boost earning power is to have a side hustle or to get a second job.
Invest in the stock market Historically, stocks have outperformed inflation. While there may be a momentary downturn during inflation, companies find a way to deal with it and often pass down increased costs to customers, protecting their bottom line. Setting aside some money in the stock market is a good way to invest and beat inflation in the long-run.
Invest in real estate Real estate has also been a good hedge against inflation in the past. With interest rates at a all time low, you can also possibly score a really good mortgage rate. It would also be a good idea to lock down the interest rate for the next 3 to 5 years so that when interest rates do rise in the future, you are still able to pay the fixed low rate. If you purchasing a home for yourself, not only do you build home equity, but you can also decrease your home related expenses and increase your savings! Mortgage payments are often cheaper then rent, and you can further reduce your costs by renting out a room and house hacking!
Cut down on Costs With the uncertainty that lies ahead, it is a good idea to cut costs and to save up in case anything happens. Unless you absolutely have to, put off buying a car, as it attributes to one-third of the CPI increase. I know everyone is dying to go traveling, but a trip can be very expensive now and in the coming months considering the overpriced travel industry, such as hotels, rental cars, and weakening dollar. Also, with the volatility of the market with the uncertaintly of inflation and potential recession, it might be a good idea to save up some extra cash in case a good deal comes along.
I'm still thinking through my game plan and if you are interested in how I'm going to budget and invest, comment below! I might come up with another post in the future about what I plan to do, step by step :)
Disclaimer: Please keep in mind that this is purely my opinion and based on research that I’ve done. This is not financial advicee as I’m not a financial advisor, so please do your own research before making any investments.