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Inflation Creeping into Personal Finances

Inflation Creeping into Personal Finances

April 19, 2022
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If you have a balance on a credit card or an adjustable-rate mortgage, you might be noticing changes in your payments. Higher interest rates are starting to ripple through the personal finance landscape, and it doesn’t look like that trend will change anytime soon.

The Federal Reserve has indicated it plans to keep raising short-term interest rates to help manage inflation, which is at its highest level in 40 years. We’re already seeing the effects of inflation when buying gas or groceries, and you’ll certainly notice it if you shop for a new or used car.

The Federal Reserve’s job is to control inflation. By raising interest rates, the Fed hopes to slow spending, bringing down consumer prices.

Time will tell whether higher interest rates will prompt you to consider changes to your portfolio. Remember, your overall strategy considers that there will be transition periods in the economy.

Remember that consumer staples -- things we all need and use from food and drink to toilet paper -- will still be bought and consumed despite rises in price. Yes, we can all economize by buying or using less, but higher prices will not totally crush demand. 

Another area of accepted higher prices and growth is housing. Rents are rising when vacancies allow. Higher construction costs due to supply shortages as well as general inflation are passed directly to new home buyers by builders. The fact that we seem to have a housing shortage (for how long?) further prompts demand. 

Banks should also earn more as rates on loans, etc. grow. However, margins may be 'baked in' in advance of the actual returns, so patience is in order.

Regardless of a belated attempt by the administration to reverse course, energy in the form of oil and natural gas cannot be quickly increased to offset price pressures. Also, oil drillers and producers are understandably wary of heeding the cry for more product after being burned twice in recent decades by unexpected low prices and government interference.

Finally, alternative energy -- solar, wind, hydro, tide-surge, etc. -- which should be seeing great demand and higher prices, does not appear to be easily investable. 

In the meantime, some may want to look at I Bonds which are issued by the U.S. government and earn a fixed interest rate plus a variable interest inflation rate that’s adjusted twice a year. I Bonds have certain purchase limits, restrictions, and tax treatments, so they generally play a limited role in your financial picture. We hesitate to recommend them as they are always playing catch-up in their inflation adjustment.

If you have any questions about inflation or interest rates, please reach out. We’re always here to help put things into perspective.