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Inflation and the Future

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Monday, January 10, 2022

With 2021 coming to an end, we look ahead at what the future holds, economically speaking. With stimulus checks a thing of the past, but Americans having amassed big savings during the pandemic, pocketbooks are a little on the fatter side for once. Wages are also rising at the fastest pace in decades because of a major labor shortage, putting even more money in people’s hands.

Earlier in 2021, many forecasters expected the millions of people who lost a job or left the workforce early in the pandemic to return to work. Unfortunately, that didn’t happen, leaving many wondering if several million workers have left the labor force for good. Lots of baby boomers retired and record stock market gains have made it easier for them to stay at home.

One of the silver linings of the pandemic-induced labor shortage we’re currently seeing is that workers are enjoying the biggest increase in paychecks in decades. Average hourly wages, for example, have bumped up almost 5 percent in the past year. By contrast, wage increases barely grew more than 2 percent annually in the previous decade. Even more important, that puts money into the hands of consumers — and consumer spending is the main engine of U.S. growth, accounting for about 70 percent of all economic activity.

On the downside, the biggest increase in U.S. inflation in almost 40 years caught most Americans by surprise. The yearly rate of inflation hit as high as 6.8 percent.  The good news is that almost every economist thinks inflation will slow, and sharply, next year. However, few are on board with the Fed’s forecast that we are heading back to the sub-2 percent inflation rates that we have been accustomed to.

The general consensus is that the combination of higher inflation and the Fed moving to phase out its own large monetary stimulus for the economy is likely to push interest rates higher in 2022. Higher borrowing costs are likely to exert a small drag on the economy. The 30-year mortgage rate, for example, could climb to 3.75 percent from around 3 percent right now. Car loans could also become more costly.

Higher rates will likely slow the uptick in home refinancing and even out home sales. On the flip side, savers who took a beating during the pandemic could finally make a little money on CDs and bank deposits if inflation drops as sharply as some are predicting.

Richard Eden, Senior Vice President of David Lerner Associates, “The big question is – how does inflation affect your cash flow? Does it have an effect on you if you get a raise? In the event you have got a raise — is it enough in today's marketplace? The problem with just looking at how wages have increased without taking into account inflation results in a skewed, or false statistic.”

Case in point — as mentioned above, the inflation rate shot up to 6.8 percent. Wages, on the other hand, have seen a 5 percent increase. And so you start to see the problem. With inflation outpacing wage increases, there results a deficit in actual earning versus the cost of living. 

Making sure that you have money saved and invested is one way to combat inflation. Get as much advice as you can from a professional and work out what you need to have in cash reserve, and what you can invest. Put a budget together and work hard to make sure you are on top of any increase in bills or living costs. Inflation is a reality we all have to deal with, but if you are smart about it you can be prepared and not lose out on any quality of life as a result. 


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.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. 
Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable-- we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances. Member FINRA & SIPC
 

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Founded in 1976, David Lerner Associates is a privately-held broker/dealer with headquarters in Syosset, New York and branch offices in Westport, CT; Boca Raton, FL; Lawrenceville, NJ; and White Plains, NY. For more information contact David Lerner Associates Call 800-367-3000 Visit our website: www.davidlerner.com

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