It has been so long since inflation has been above its long-term average level of 3.2% that it is worth discussing its impact. With the higher inflation level we are now experiencing, the cost of virtually everything should be expected to be higher. For example, the cost of gasoline has risen by over $1.00 per gallon since the beginning of the year. This is a more dramatic price increase than the average across the economy which is currently around 5% to 6%.
We are also seeing a shortage of workers creating wage pressure that leads to higher salaries and higher hourly pay. With higher labor costs and higher costs for all the other inputs that go into making things, virtually all goods and services will be more expensive next year.
Fortunately, those individuals who are receiving Social Security income benefits and those that have inflation adjusted retirement annuity payments will see larger amounts on their checks beginning in January. The government announced that income benefits would be increased by 5.9% next year. This is the largest single year percentage increase in almost 40 years. By comparison, the increase for 2021 payments was only 1.3%.
From an investment perspective, stocks have a stronger ability to deliver positive returns during inflationary periods while expectations should be lowered for the returns from bonds. For diversification reasons, and the inability of anyone to predict when the higher inflation will subside, bonds should be retained in all investment portfolios.
If you have questions or concerns about how the higher rate of inflation may impact your finances, please contact us.