Inflation without Interest Rates

Inflation seems to be one of the more serious concerns to have developed over the past few years.  Decades of reckless federal spending have nourished a healthy appetite for risky investments for institutions and individual investors alike.  As the money supply and asset values increased, I became more and more skeptical of the consumer price index.  Inflation is tangible in a lot of ways and we all saw price increases on all sorts of everyday items.

I’m not the only one who is critical of the consumer price index (CPI).  It rarely seems to line up with reality.  Over the past ten years, price increases on consumer goods have been dramatic but the CPI was often below 2% each year if you look at a chart.  We all knew things were getting more expensive but it was never reported accurately.

In a Bloomberg article last week, inflation for 2021 was reported to be 7%, defying even the highest expectations.  Please tell me what you buy consistently that’s only 7% more expensive than it was a year ago.  Once again I think it has been reported on the low side.  Even still, it came out much higher than it has in past years.

In order to keep up with inflation it seems as though you have to take risk.  If you have been invested in real estate and the stock market then you’ve done just fine but moving forward carries even more risk.  Some people don’t want risk and unfortunately interest rates have not cooperated to give safety conscious people many options.

For years people have been telling me they don’t want to make a commitment because inflation is going to take off.  By now we know that may be true but it doesn’t mean that you’ll be able to get more interest at the bank.  I’m sorry but inflation doesn’t mean higher interest rates on consumer financial products.

It’s a common misconception regarding the interest rates that the Federal Reserve controls.  A lot of people don’t realize that the Fed only sets the interest rate at which banks borrow money from it.  When the Fed raises interest rates then it costs banks more to borrow money.  They will in turn charge more for car loans, business lines of credit and mortgages but it doesn’t mean the are going to pay you more for a CD right away.  Insurance companies work the same way.  Consumer rates lag behind and don’t ever respond directly to inflation.

It’s a vicious cycle.  For the past few decades, the Fed has lowered rates every time the economy seemed to start slowing down.  Easy money fueled business expansion and real estate development.  Now they want to slow it down by raising rates.  The economy never likes it when that happens so they lower rates to get everything moving again.  

The high rates you want for retirement assets could get stuck in limbo.  If the rally turns into a recession then the Fed will have to lower rates before you see any meaningful increase in bonds, CDs and annuities.  Leveraging rates for higher growth potential is a good way to protect assets and hedge against the unknown.  If you want to know how to do that then give me a call.  

The Fed plans at least four rate hikes this year to curb inflation.  Can they do it without damaging the economy?  It remains to be seen but the stock market didn’t like it this week so I guess we had pretty good timing with the last podcast.  Inflation is already here but rates on safe investments are still stuck at all-time lows.  If you want to protect money then you need to start exploring alternatives for higher yields.

Think about it and enjoy your weekend!

Bryan

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Bryan Anderson

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