By Shane Cummings, CFP®, AIF®, Wealth Advisor & Director of Technology/Cybersecurity
Inflation trends have been heating up over the past year. Increasingly, the media have focused on its impacts on all Americans as well as consumers worldwide. Inflation numbers as reported by the U.S. government contain a lot of underlying data that is not immediately obvious from reading headlines.
So the most salient questions are: How bad is inflation – and what does that mean for me?
The “basket” number: 7.5% over the past year
The U.S. Bureau of Labor Statistics (BLS) publishes the CPI, or Consumer Price Index, data every month. The CPI attempts to measure the “average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.” The underlying components of CPI may impact you very differently than someone else.
For the 12-month period ending January 2022, inflation rose 7.5%. However, that 7.5% number is the average of the basket of goods and services tracked. Many specific items experienced notably different inflation rates over that period.
Cars, energy and housing
Over this same 12-month period, used car and truck prices increased by 40.5% according to the BLS. If you happen to be in the market for a used car or have purchased one recently, you’re no doubt experiencing sticker stock as prices have increased dramatically versus a year ago. This is due to a variety of factors like production delays in the automotive industry as well as supply-chain shipping issues that impact automobile imports. If you’re about to renew a lease for your car, or looking for a used car for a relative or child, that’s going to have a dramatic impact on your bottom line.
New vehicle prices are up over 12% for the same period – if you can find one to buy. Energy prices for gas, motor fuel, and fuel oil are all up 40% or more as well. What this amounts to for most of us is a major increase in transportation costs. If you own your vehicle outright or are making payment on a fixed rate vehicle loan, you may be shielded from most of this increase.
Energy price increases in general usually filter through to price increases in goods and services but with some lag. Inflation in food prices is running at a 7% rate which, compared to other categories, is less, but can still make a meaningful difference to a middle- or lower-income family.
The average rent increased 3.8% over the past year while owner’s-equivalent rent increased 4.1%. You should keep in mind that with rent and housing issues, this average increase masks a high degree of variability across markets. As many people have relocated to different states during the COVID pandemic, some cities in particular have seen rent increases and also home price increases that have been very substantial, pricing some locals out of the market.
If you already own your own home and have a fixed rate mortgage locked in, you won’t have experienced any price increase, but you may start to notice an increase in property tax assessments if you live in a desirable market. If you are a renter, you may be facing some pretty substantial rent increases that could consume your available discretionary spending budget.
Keeping your assets and liabilities in alignment
Ultimately, the impact inflation is having on your budget depends on your personal circumstances and financial picture. The inflation environment could be placing a huge stress on your finances right now or be relatively muted. To help clients align their long-term goals with their future resources and claims – both short and long term – our proprietary Resources Claims RatioTM gives them a detailed view of where their households stand. We have written more extensively about this methodology behind Resources Claims RatioTM in this article and more about the causes of the current inflationary environment here.
One long-term hedge against inflation is to be invested in the financial markets with an appropriate blend of equities and other diversifying assets. It may be appropriate to set aside some more conservative holdings like cash to cover short-term liabilities, and build a customized allocation for longer-term growth assets. We use our LifePhase Investing™ methodology to determine an appropriate portfolio blend in an effort to achieve long-term financial success in any market environment.
As always, we’d welcome discussing your specific financial concerns and challenges with you. Please contact your Halbert Hargrove advisors with any questions you may have.
Source consulted: Bureau of Labor Statistics, U.S. Department of Labor, Consumer Price Index News Release, Consumer Price Index – January 2022 https://www.bls.gov/news.release/archives/cpi_02102022.htm
Disclaimer:
Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant.
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