Inflation and Investment
Inflation is a problem that cannot be stopped, but its effects can be minimized. When speaking about inflation, President Reagan said, “It distorts our economic decisions, penalizes thrift, and crushes the struggling young and fixed-income elderly alike.” This rings true today.
Alarmingly, the current American rate of inflation is set to increase over the next few years. The Federal Open Market committee forecasts the U.S. inflation rate of PCE or personal consumption expenditures will rise from 1.6 to 1.9%, and then rise further to 2% by as soon as 2019/2020.
What does this mean for the average American? Of course, savings need to be planned for and made, and investments could help. Inflation affects everyone, but it impacts people in different ways. Inflation hits the middle class exceptionally hard. When prices go up, their hourly wages do not reflect the increase in the cost of their daily lives. This also means they have less they can set away to save, as they need to spend that money immediately on essentials.
For someone who is trying to work out what they need to save in order to retire, it has a drastic effect, as the day-to-day expenses are going to increase. If, for instance, the retiree puts a budget in place for food, and over 10 years the price of necessities goes up. Then this means they will have less money to survive on or have to slash costs elsewhere in order to put food on the table or keep a roof over their heads. So, when planning for retirement, inflation has to be taken into account.
Alarmingly, students are under fire as well, and the fact that student loan debt is the largest source of debt to Americans after mortgages makes their predicament worse. Reports this year show that more and more people are falling behind on their repayments. CNBC reported that over one million borrowers defaulted on at least one of their student loans in 2016.
College also costs more than ever before. Between 2002 and 2013 the price of college textbooks rose a staggering 82%! This means that students are having to work longer and do more jobs to get by and will probably stay in debt for years.
Inflation is always going to be there, but saving to try and minimize the effects it has on your life or the lives of your children could save you a lot of anguish in the years to come.
IMPORTANT DISCLOSURES
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.
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