Many Americans are feeling the effects of inflation. Recently, the U.S. Bureau of Labor Statistics report showed inflation increased by 9.1%, the highest increase since November 1981. It is easy to point fingers at why inflation is high, but our team of financial advisors is here to help you and your family navigate the current economy.

What is inflation? 

Inflation is one of the most used economic terms, but do you know what it means or the factors involved? Inflation measures how prices increase over a period of time, affecting the purchasing power (value) of your dollar.

Why does inflation exist?

Many factors go into inflation, but one of the biggest drivers of inflation is the price of oil.

1. Oil — We have seen the price of gas at the pump increase over the past couple months. The increasing cost of crude oil is one reason why. It is a globally priced commodity that sets roughly 60% of the price of gasoline. Gas prices are made up of several elements, including crude oil prices, refining costs, distribution expenses and taxes. The price of crude oil isn’t the only thing impacting oil prices. Oil production pre-pandemic was around 14.0 million barrels per day (BPD) and current oil production is around 12.1 million BPD. With production not fully back to normal and summer travel in full swing, the demand has increased and supply has been unable to keep up. This has a major impact on oil prices.
2. Unemployment & Wages — Unemployment, as of July 2022, was at 3.5%, and there are currently two open positions for every one person looking for a job. Employee retention has been at the top of many employers’ minds, as the “Great Resignation” has people seeking higher salaries and more fulfillment in the workplace. Wages have risen to an all-time high, which increased the cost of goods across the board and impacts inflation.
3. Supply Chain — We all remember the toilet paper crisis at the start of the pandemic, right? Well, this was affected by the supply chain. The supply chain is a beginning-to-end process of making a product and getting it to the final destination. There were roadblocks over the past couple of years with COVID-19 outbreaks, consumer demand increase and layoffs to keep some companies afloat. The supply chain has been getting back to normal after a couple years of shortages but is still impacting the price of goods.
4. Consumer Savings — Before the pandemic, Americans had roughly $13.3 trillions in savings. The current consumer savings total is right around $18.5 trillion, representing a 31.25% increase in savings. Even though the cost of goods has increased, people still have money tucked away to spend, which affects inflation.

Bear Market vs. Recession

Recently, many have feared the U.S. is heading for a recession. In mid-June, the United States fell into a bear market. A bear market and recession are two different things, but both relate to the well-being of the economy.

Bear Market

A bear market is a decline of 20% or more in a major market index (i.e., DJIA, S&P 500, Russell 2000, NASDAQ and MSCI EAFE). A bear market does not automatically lead to a recession but signals that the economy is under pressure.

Recession

A recession occurs when a negative Gross Domestic Product (GDP) lasts for two consecutive calendar quarters. This generally results in rising unemployment, a decrease in sales and an overall decline in the economy. A recession needs to be declared by the National Bureau of Economic Research (NBER).

Are we going into a recession?

Recessions are a normal part of the economic cycle, but they are not easy to predict. History shows that for every downturn, there is a recovery. No matter what, we won’t stay in a recession forever. Many people worry that it is different this time or try to compare our current economy to past recessions. Here are a few examples when Americans were concerned about the future of the economy and were worried that they had never experienced a recession like this before.

1918: Spanish Flu Pandemic

The United States had its first recorded case of the Spanish Flu in Kansas that subsequently killed an estimated 50 to 100 million young adults. It killed an estimated 8 to 10% of all 20- to 30-year olds worldwide. This took a hit on the economy, but over the next decade (1920-1929) the stock market quadrupled.

1939: World War II

When Hitler invaded Poland, sparking World War II, the Dow still increased 10% the next day. When Pearl Harbor occurred, the Dow dropped 2.9% but recovered within one month. From 1939-1945, the Dow gained over 40% (7% per year) and continued until the bear market of 1957.

2009: Financial Crisis

Many of us probably remember the crisis in 2009 when the entire financial system as we knew it was in jeopardy. It made unemployment and inflation rise to new extremes many had not seen in their lifetime. One year later, the S&P 500 was up 47.3%.

2020: COVID-19 Pandemic

During the COVID-19 Pandemic, the S&P 500 dropped 34%. Six months later, the S&P 500 was up 53%.

What may be in store?

Philip Blancato, CEO & President of Ladenburg Thalmann Asset Management, has stated that after the summer driving season, he hopes to see a normal demand reduction in gas prices. Assuming employment stays strong and the supply chain continues to normalize, we could see a break in inflation and a September rally in the stock market.

What should I do now?

Now that we have touched on what inflation is, why it exists and projected what inflation might do in the future, let’s focus on it right now. The national inflation rate and your personal inflation rate are going to be different, especially depending on where you live. Here are some steps that you can do right now to help with inflation.

1. Build a budget to control spending. Maintaining a budget can help you figure out how much money is coming in so you can make every dollar you own count. Budgets can feel restricting at times, but we created some tips to help you stick to your budget.
2. Talk to a trusted financial advisor. When picking a financial advisor you need someone who will customize a plan to fit your life. You also want to make sure they have the knowledge and experience to help you take an active role in building a personalized plan. Our advisors are committed to providing you with peace of mind and helping you feel confident about your financial decisions.
3. Increase 401(k) contributions. Unless you are ready to retire and begin taking income, consider increasing your 401(k) contributions. Instead of following the natural response to selling your equities and shutting down your contributions, you can think of the stock market as being “on sale.”
4. Don’t fear inflation. So much of what is on the news is political. It is important to keep in mind that these are basic supply and demand issues. In its nearly 100-year history, the modern stock market has always recovered. It’s just a matter of time.

If you are unsure of what to do, allow our team of trusted financial advisors to aid you in your financial planning goals!

FAQs about inflation:

• What does inflation mean?
• Why does inflation exist?
• What is a bear market versus recession?
• Are we going into a recession?
• What should I do now?

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