Inflation Crushing Middle Class.
Economics 101: More money chasing goods and services creates higher prices and devalues the value of our savings and investments.
$5 Trillion dollars+ just dumped into the economy via spending bills is the main reason for massive inflation.
Other reasons include Government over-regulation of business and slowing our country’s fossil fuel production. Less supply of necessities also leads to higher prices. Think shortages.
We have Stagflation (inflation of prices and GDP going down).
The Federal Reserve bought this administration’s baloney that inflation was temporary last year and now they are way behind their goal of 2% inflation. Their solution is to raise the Federal Reserve interest rate. I don’t think interest rates have ever been raised when the economy was slowing like it is now. This could be a disaster.
Arguably, the biggest driver of our economy is home building because of its ripple effect. Increased interest rates have led to a doubling of mortgage rates which has crushed that industry. Higher mortgage rates lead directly to lower home values. This coupled with falling stock and bond prices led to U.S. household wealth falling by a record $6.1 trillion in the second quarter to its lowest in a year.
Mortgage demand from homebuyers falls 29% since last year, as interest rates surge past 6%
Therefore, the cost of buying a home has skyrocketed this year, while rent prices have gone through the roof over the past couple of years! Mortgage apps and interest rate charts link.
What’s worse is the cost of groceries: Over the last 12 months, grocery prices soared 13.1% — the largest annual increase since the year ending in March 1979, the Bureau of Labor Statistics.
The cost of eggs has soared by 38%, and prices for other goods have also jumped: Flour is up 22.7%, chicken 17.6%, milk 15.6%, ground beef 9.7%, and bacon 9.2%. Fruits and vegetables got 9.3% more expensive.
This is all very painful and it’s felt most by the middle-class and lower-income people. They have very little or no ability to come up with the extra money to pay for these things. Roughly 2/3 of Americans live paycheck to paycheck. The typical wage has gone up roughly 5%, not keeping up with the increases in basic necessities.
The only choice for many millions of people is to use a credit card. No surprise:
Since the second quarter of 2021, credit card balances have risen by $100 billion. That’s a 13% increase, the largest year-over-year jump in more than 20 years.
I almost forgot to mention the cost of Natural Gas. Since the beginning of 2021 ($2.60) it has tripled to $8.70. Watch your utility bills going forward. Ouch!
Enough of the horrendous, scary economic summary brought on by terrible economic policy. This too will end.
How can this change? It will change when inflation shows a real decline (not just because of a massive slowdown in demand) and the Federal Reserve takes its foot off the gas by not raising interest rates. This may not be for a while, but it will happen. When it does there may be a fast, great turn in the markets and we don’t want to try and time this. Today’s Investment Conundrum
In the meantime, one silver lining is investors can earn over 3% currently in 2-year Treasury notes. That’s nowhere near enough to keep up with inflation, but it’s great for people that want to protect their principal without much price risk from longer-term bonds or stocks.
If you would like to discuss your portfolio or financial plan click here to set up a call.
Brad Rosley, CFP®
630-942-9007
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