Answers to your top inflation questions
Been there, done that. Don’t want to do it again. That’s how many people who lived through the 1970s and 1980s feel about inflation. But today’s reality is that your money isn’t going as far as it once did, and you’re probably wondering if the situation will get worse. Since there isn’t a crystal ball to predict what will happen with the economy, let's focus on what we know. Here are some of the most common inflation-related questions and answers.
1. What’s causing prices to rise?
Several factors have contributed to the price hikes we're seeing everywhere: the COVID-19 pandemic and related shutdowns; government stimulus payments; problems with the supply chain; and a tight housing market are all likely contributors.1
2. Will this be the next “Great Inflation”?
Much of how inflation plays out in the economy depends on what's causing it. And luckily, the root causes of today's problems aren't the same as what caused the Great Inflation of the 1970s. Due to the one-two punch of inflation, plus high unemployment in the 1970s, the recovery was slow.2 In 1975, the unemployment rate was 8.5%. And while inflation is high today, the unemployment rate is low at 3.5%.3
3. How can I make sure I don’t fall behind?
The US government has recently announced several options to help you keep pace with rising prices. For example, the IRS increased the taxable income thresholds for seven tax brackets, which could save some people money. The IRS has also announced that it will raise the amount you can contribute to your 401k or 401(3)(b) account in 2023 by $2,000.4
Also, a cost-of-living increase of 8.7% will be sent to Social Security recipients, the biggest increase in over 40 years. These efforts won't reduce inflation, but they are an attempt to help keep pace with inflation and minimize its impact on your pocketbook.4
By making a budget, and tracking and reducing your expenditures, you can avoid falling behind. Most importantly, make sure your emergency fund is maximized. There's no escaping the fact that prices are rising across the board, so whatever your emergency is, you'll have to spend more money to solve it.
4. How long until prices drop?
Price declines can't be predicted, but there are mechanisms to contain them, like interest rates. To slow the economy and inflation, the Federal Reserve raises rates. The Federal Reserve was able to “break The Great Inflation” using this strategy, and if it can be done under the one-two punch of inflation and high unemployment that occurred in the 1970s and 1980s, there’s reason to believe it can be done now.5
And we've got another thing working for us in today’s economy – the Amazon effect, which is all about price transparency. With the ease of online shopping, you can find the best deal on just about anything, which makes high prices harder to sustain.5
5. Should I make any changes to my retirement plan due to inflation?
The answer to that question depends on your investment time horizon—which one of these scenarios applies to you?:*
- I’ll be working for at least another 20 years
If you still have a fair amount of time before you plan to retire, consider maintaining your position in a well-diversified equity portfolio and continue to follow the investment plan laid out by your financial professional. This strategy makes sense even in a down market because historically equities (stocks) have annualized gains of 7% to 9%. For example, between 1990 and 2020, the S&P 500 Index’s annualized gain was 7.5% (excluding dividends), which outperformed inflation.6
- I hope to retire within the next 10 years
If you’re approaching retirement, then you have less of a runway to make up for market swings or lost savings due to rising prices. You may consider further diversifying your equity portfolio, and potentially shift a portion of your investments toward annuities. Annuities generally present a lower risk profile and can provide an income stream. Inflation-adjusted annuities, which have variable cash-flows that adjust for inflation, may be another option to consider to further reduce risk as you approach retirement.
- I’m retired
If you’re already retired, you will likely want to stay in low-risk investment vehicles whose objective is to help your portfolio to continue providing the funds needed to cover your retirement lifestyle. Typically, financial professionals advise retirees to have a mix of annuities and bonds, which are historically low-risk and meet or beat inflation. Inflation-adjusted annuities may also further reduce your risk.
Even though rising prices may make you question your long-term financial goals, don't chase performance or try to time the market as these tactics are rarely successful and highly risky. However, now is a great time to review your portfolio. You may find that you already have inflation protection within your diversified portfolio, but you may find it helpful to talk with your financial professional who can provide insight into how inflation is affecting your investments.
*For educational purposes only, not meant as investment advice. Your time horizon, risk profile, and investment needs are unique to you. Please speak with your financial professional before making updates to your investment strategy.
1 Source: “What Is Really Driving ‘Inflation’ Today, Forbes.com, (September 2022).
2 Source: “Lunch Box Stagflation Isn’t Your 70s Style Slowdown,” LPL Financial Research, (September 2022).
3 Source: “The Employment Situation – September 2022,” Bureau of Labor Statistics, (September 2022).
4 Source: “IRS Increases 401(k) Limit By Record Amount As Inflation Surges,” Financial Advisor Magazine, (October 2022).
5 Source: “Expect Inflation to be Contained Long-Term—No Foolin’,” LPL Financial Research, (April 2022).
6 Source: LPL Research, Bloomberg, DALBAR, ClearBridge Investments 6/30/21
This material was prepared by LPL Financial, LLC.
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All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. No strategy assures success or protects against loss.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Annuities are long-term investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply.
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