May 23, 2022

As you may have noticed, inflation is here. In April, inflation was 8.3% compared to last year, slightly down from March, which was 8.5%, but still a four-decade high inflation rate. ⁽¹⁾ The Federal Reserve believes that they have the resolve and ability to bring U.S. inflation down, but to what level, and how quickly they can do so is still in question.⁽²⁾

What got us here?

The uncertainty around the conflict in Ukraine has driven up food and energy costs, two of the most noticeable price increases Americans see in their day-to day lives.⁽²⁾ Both Ukraine and Russia are major producers of oil, natural gas, and grain; conflict makes those unavailable, driving up prices.⁽⁷⁾
The supply-chain issues caused by the pandemic also play a factor, driving up prices as companies are unable to move goods from place to place as quickly, or must pay more to do so.⁽⁵⁾
The pandemic increased consumer demand for goods and services, “a lack of spending due to being forced to stay at home, and a desire to enjoy life again after what has been a stressful few years triggered a desire to consume, travel, and buy.” ⁽⁴⁾ As a result, despite high inflation, U.S. retail sales grew 0.9% in April, and some companies are taking the opportunity to raise prices.⁽³⁾⁽¹⁾
Another important factor at play is the high demand for employees, with two job openings for every available worker, driving up wages but also costs for American businesses.⁽¹⁾⁽⁵⁾
Finally, previously low interest rates from the Federal Reserve made borrowing cheaper, making big purchases more attractive, both for consumers and for businesses.⁽¹⁾

How do we get out of this?

The Federal Reserve is taking action to fight high inflation. Since the beginning of the year, the Fed has increased interest rates twice, first by a quarter percentage point, and then most recently by half of one percent.⁽²⁾ This sounds like a small increase, but it is a large change from nearly a decade of historically low interest rates, and increasing the federal funds rate has rippling effects in our inter-connected economy. Federal Reserve Chairman Jerome Powell has also indicated they will take further action, potentially raising their rates by another half percentage point at their next two meetings, in June and July. ⁽²⁾

Overall, what does this mean for me?

Likely, high inflation will continue in the foreseeable future.⁽¹⁾ Workers will likely continue to ask for wage increases as they find their income no longer goes quite as far, and retirees may suffer if they do not take action to increase their retirement income. As well, first-time homebuyers may find their home is less affordable than they had planned. Winners in this period may include investors in companies with strong pricing power, and owners of assets that have increased in value.⁽⁴⁾

To learn more about how to navigate this inflationary environment and reach your short-term and long-term investment goals, contact me today.