The Google definition of inflation is: “A general increase in prices and fall in the purchasing value of money over time. Inflation can occur when prices rise due to increases in production costs, such as raw materials and wages. A surge in demand for products and services can cause inflation as consumers are willing to pay more for the product.”
An example of inflation is the cost to cross the Marine Parkway-Gil Hodges Memorial Bridge. When the bridge opened on July 3rd, 1937, the cost to cross the bridge was between 10-15 cents, depending on the type of vehicle. The current cost is $5.09 by mail and $2.45 by E-Z Pass.
The Federal Reserve wants to keep inflation under the 2% benchmark. Right now, inflation is running around 3% which is in the danger zone. As per Barron’s, the FOMC (Federal Open Market Committee) released minutes from its June monetary policy meeting. Fed officials signaled that interest rates would rise sooner and faster than Wall Street expected prior to the meeting, as inflation is rising at its fastest pace since 2008.
What does this all mean? This means that if you are on a fixed income, your money will not go as far during inflationary times. This also means, if you have investments and/or money in the bank that is “netting after-tax” less than 3%, you are losing money (purchasing power). These are important barometers that few people are paying attention to right now.
People have been couped up (myself included) during the height of Covid-19 and many persons now have more spendable income. A combination of inflation, the Suez Canal blockage, and higher demand for travel has skyrocketed travel costs in the past month. Hotel costs in Miami Beach have risen 50% since the last week in June. Rental cars are up 110% this year and are 70% higher since the pre-pandemic in 2019. Oil prices could soon hit $100/barrel, which will also spike gas prices.
There are options where one can position assets to fight inflation or at least break even, as interest rates are likely to rise over the next 12-18 months. I have seen banks that are paying anywhere from .10% to .50% interest.
Every situation is different, depending on one’s risk tolerance. Some suggestions below can help you offset inflation’s eating away at your purse or wallet:
- Shop Your Bank Account rates: Take a look at your most recent bank statement. The internet makes it much easier to shop interest rates and there are virtual banks (meaning they have no brick-and-mortar locations) that will pay a higher interest rate.
- Consider Credit Unions for Emergency Funds: Credit Unions will usually pay a higher interest rate than your typical bank. For example, the Italo-American credit union is currently paying .75%.
- Fixed Interest Annuities vs CDs: Many conservative investors still have large sums sitting in CDs (Certificates of Deposit). CDs can also stand for Certificates of Disappointment! CDs are taxable (even if you do NOT withdraw funds). If you have a CD earning 3% and you are in the 30% tax bracket, you are netting 2.1% after-tax. A fixed annuity paying 3% is tax deferred (the same 30% tax bracket person is netting a taxable equivalent of 3.9%). Many people are unaware that Fixed Annuities are protected by New York State up to $500,000, whereas banks are protected by FDIC (Federal Deposit Insurance Corporation) up to $250,000. Insurance companies will usually offer higher interest rates.
- The Stock Market: Obviously, stock market returns can exceed inflation; however, there is the risk of loss that options 1,2,3,5 and 6 do not have.
- Cash-Value Whole Life Insurance: Money that is inside your cash-value life insurance usually sits in the insurance company’s general account. Many insurance carriers are still paying in the 4% range.
- Consider Buying Series I-Savings Bonds: The I stands for “Inflation” bonds. These bonds may be purchased (up to $10,000) online by opening a Treasury Direct account. The Treasury Direct account is linked to your personal checking account, and you can transfer up to $10,000 at a time. Currently, Series I-Savings Bonds are netting 3.54%. There is no risk of loss with these bonds.
To summarize, these are important times to huddle with your advisors and make sure your money is working for you instead of being eroded by inflation!