Inflation in 2021 was an expected response to the halted 2020 economy.
There was a 5.4 percent increase in prices in June of this year, which is the highest inflation rate we’ve seen since 2008. That rate was also 5.4 percent in September, which was higher than anticipated.
We knew the rise in inflation was coming, partially because the Federal Reserve has continued to lower interest rates and pump more money into the economy. These measures were taken to keep the economy going in the midst of the COVID-19 crisis.
But there are other factors that have contributed to the rise in inflation as well, and they may continue to have an impact going into 2022.
Why is inflation rising?
The Federal Reserve did have a hand in the rising inflation rate, but there are other factors that went into it.
First, the CARES Act stimulus payments, which put money directly into the bank accounts of Americans, certainly had an impact. These relief payments were intended to put more money back in the economy and hopefully spur spending during the pandemic. Between those stimulus checks, PPP loans and monthly child tax credit payments, there is more money out there, which leads to inflation.
Second, there is major demand for certain goods and services. We saw this last year with the demand for home improvement services and supplies. Items were backordered or very expensive, and people had to wait a long time to have a professional work on their homes. It’s a supply and demand issue. As the demand for more home improvement options skyrocketed, the people and supplies needed to make that happen decreased. This happened with the housing market as a whole, too, as housing inventory decreased.
We also ran into supply chain issues, which added even more pressure to the demand for many items. New cars, appliances and chicken wings are just a few of the industries that hit major supply chain snags over the past year.
What happens now?
The Federal Reserve announced recently that it expects the inflation rate to be around 4.2 percent at the end of the year, which would be the highest it’s been in three decades.
Supply chain issues and other shortages should ease up, which will relieve some of the high costs.
But still, higher prices aren’t going anywhere for now.
We have taken a slightly more conservative approach with clients’ portfolios lately in case the markets start to drop. If that does happen, we will move more toward growth.
It also might make sense to hold off on major purchases until the supply chain starts to move freely again. Prices are higher right now, and there are significant delays.
Another note about the supply chain disruptions: It might be a good idea to get your holiday shopping done earlier to make sure you get your gifts in time.
But for the most part, continuing to watch what’s going on in the economy will help you to prepare and make any necessary changes. Just avoid knee-jerk reactions and remember to think long-term for your investments.
Do you need help planning for your financial future? Contact me today to set up a meeting to talk about your goals.