Mind on Money: Inflation is experienced in variety of ways

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After the unprecedented monetary policy actions by the Federal Reserve and the continuing efforts by the federal government to stimulate the economy in response the COVID crisis, I believe we are likely to hear much about increased inflation over the next couple of quarters or even years.

Inflation is an interesting topic, and one that has been off the radar for about a decade now. I break this topic into three different ranges, each with its own considerations and outlook.

The first range is what I would call the college Economics textbook range. All college Econ students are taught fairly early on that inflation tends to increase prices and drive the value of a currency down over time. This is the same definition used for professional training in the vocation of financial planning, and the definition “baked into” most financial planning software.

As with many concepts in the academic realm, the way inflation is discussed in the textbooks and experienced in reality don’t always align. But most financial advisers are taught to inflate a family’s spending needs by 1% to 3% over time, and when financial software is used this metric is almost always included.

The second range is the data range. The “data” are the headline numbers investors pay attention to when attempting to discern trading strategies based on inflation. Inflation data is released on a monthly basis, and I expect markets to become very sensitive to this inflation data over the next year or two.

This sensitivity though, also has little to do with how inflation is perceived in the real world by consumers and families, instead investors are primarily concerned with how interest rates and Federal Reserve policies may react to the data. In this realm I expect inflation data to drive market volatility in the coming months as investors begin anticipating policy changes if inflation data picks up materially.

The third range is what I would call the “real world.” For families progressing through life and their working years with kids, cars, insurance payments, home improvements and travel, inflation is real and sometimes perceived far in excess of what the “data” shows. In this regard, as a consumer I find inflation neither linear, in that it sometimes seems to spurt forward quickly, nor predictable, in that sometimes price changes seem to lie dormant or in many products and expenses even reverse over time.

At the same time, however, after working with families both preparing for and navigating retirement for nearly 28 years now, I have observed that inflation is perceived quite differently by retired folks. It is very common in Northwest Indiana for retirees to live on monthly budgets between $5,000 and $10,000. I like to say, sure, bread and milk may have gone up in price by $1.00, but most retirees only buy two loaves and two gallons a month, and a $4 increase in prices in a family budget of $5,000 to $10,000 a month doesn’t move the needle much.

Plus, retirees are more likely to have homes that are paid off, or closer to being paid off, and they tend to drive their cars a bit longer than non-retired people, which tends to drive spending needs down over time. So, while conceptually when doing retirement planning, spending needs are almost always modeled to increase over time, in my experience retirees often stop experiencing inflation as an overall increase in their monthly budget, and tend to experience price increases in “pockets” such as health care and travel.

So, from a planning point of view, am I concerned about inflation? Of course, its part of my basic training. But from a logistical point of view it’s still not the highest “real world” concern on my list right now for my clients. I am however, concerned about the financial market volatility that appears poised to emerge as inflation data changes over the next year, so inflation is a topic we will likely explore much more often going forward.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.