Your Financial Future: Inflation slowdown stokes optimism

The stock market has been experiencing a nice rally the last week, likely because investors are hoping for an interest rate cut by the Federal Reserve. Their optimism is based on the inflation rate slowing. While we are making some improvement because of higher interest rates, we still have a way to go.

Last year inflation hit a 40-year high not seen since the 1980s. Supply chain issues that were aggravated by the COVID-19 pandemic was a big part of inflation. The most basic economic principle of supply and demand played a crucial role. Consumer needs such as face masks and hand sanitizers were purchased like never before. Home improvement supplies and home exercise equipment sold in large quantities. Lumber prices soared through the roof.

Other categories such as cruise lines, restaurants and theaters fought to survive. People were afraid to attend or restrictions were issued to limit participation to control the spread of COVID. Today, vacationing, air travel and dining out are experiencing big growth to meet the pent-up demand. All of these factors are affecting inflation.

Another factor that led to out-of-control inflation was all of the stimulus money that was distributed to people who did not need it or did not suffer a loss. One example was retirees who continued to receive their Social Security checks and pensions. While they could have suffered some temporary losses on investments, it is not the government's duty to protect them. All of this excess money in the economy helps create inflation.

The three-year pause on student loan repayment also contributed to the problem. While a short break at the beginning may have been warranted, there is no reason that this has extended for three years and is not scheduled to resume until October. Interest will again begin to accrue starting in September. While many people lost jobs early in the pandemic, there have been "help wanted" signs everywhere and anyone who wants a job can get one. The two to three hundred dollars a month that would go to repaying loans is being spent on other things and increasing inflation.

Of course, one of the biggest factors was the near zero percent interest rates since the recession in 2008. Below-normal rates created a number of bubbles throughout the economy. These low rates were one of the biggest catalysts to the bull stock market. Investors had limited option where to put money because bonds and CDs offered very little return.

There is a new term we are hearing today called "Greedflation." This is when companies do not reduce prices as quickly when their costs go down. There is often a delay before both raising and lowering prices as cost structure changes. Some of this is structural since major customers may have contracts guaranteeing a specific price for a certain time. When COVID first hit and many people were losing jobs, companies often held prices steady because they were afraid customers would not be able to afford to purchase their products. Also, manufacturers may be facing higher wage costs and other changes than just ingredient costs.

While the Fed took a break from raising interest rates at its last meeting, it is widely expected that it will increase another quarter point at its next meeting. The board indicated very strongly that rates are likely to stay elevated for some time. Wall Street does not want to believe that and still hopes rates will start going down soon. Even when they do start to decrease, they are probably never going back to the near zero rate that we had in 10 of the last 12 years.

Plan your investments accordingly. Controlling inflation will not lower the cost of things to their previous level; it will just keep things from increasing so fast.

Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, "Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility."

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