Is Inflation Good or Bad?
Inflation is the steady rise of prices for goods and services over a period of time. It also is a result of how the Federal Reserve controls our money supply. At different times and circumstances inflation can be either good or bad for us. It is dependent on our own situations. If you owe money, inflation can be a good thing. If people owe you money or your income is fixed, inflation can be a bad thing.
To some, inflation is a warning sign of a struggling economy, where others see it as a sign of a prospering economy. Seems confusing, right? Let’s examine this more.
Over the past 18 months we have seen extreme increases in inflation numbers due to the Federal Reserve slashing interest rates, increasing our money supply, and COVID disrupting the supply and demand cycle. The shut down and then reopening created huge swings in inventories which created a domino effect on prices, thus causing a spike in inflation. We do believe some of this inflation we are experiencing is temporary and will level out. The current forecast is for inflation to end in 2021 at 5.4% and stabilize in 2022 at 3.0% due to supply shortages easing. We have been in a lower than normal inflationary period in the recent past where the average rate was 2.0% from 2016-2019. It is expected that the forecast for 2022-23 is a return to our more normal rate.
Inflation statistics gives the Federal Reserve feedback on how to handle monetary policy in our nation. Their current stance is to keep interest rates low and allow for temporarily higher inflation, as our country continues to recover from the pandemic. The Federal Reserve expects inflation to move down as time goes on and as we get back to “normal.”
Inflation erodes the purchasing power of our dollars. This lowers the value of cash which effects our daily living. It encourages some consumers and businesses to spend and stock up on items now before the cost goes up. For most, we feel the impact of higher prices when we buy our groceries, gasoline, and other goods and services. If you owe money at a low fixed rate like some of the current mortgage rates, and if inflation is reflected in increased income, as it often is, then inflation can be beneficial to you.
As with most things, finding a balance is where success can be found. It reminds me of this quote by Oscar Wilde: “Everything in moderation, including moderation.”
Information in this material is for general information only and not intended as investment, tax or legal advice. Please consult the appropriate professionals for specific information regarding your individual situation prior to making any financial decision.
Email me your questions at financial.freedom@lpl.com or call 541-574-6464. You can also post you question on our Facebook page: https://www.facebook.com/FinancialFreedomWealthManagementGroup
