An Inflation Update

An Inflation Update

May 16, 2023

As we begin to wind down the school year, summer is fast approaching. The weather is turning warm and the trees and flowers are beginning to bloom. The grass is beginning to grow like mad and the mowers are being dusted off after their months-long residency in the shed. Life outdoors is truly coming back to life for the summer in places like our state of Michigan. The growingly beautiful weather has people pondering their plans for the future. A lot of families have summer trips already planned or they have the desire to get away and do something fun with their families. A question that then arises in the minds of many parents is how they will afford such a vacation. Inflation has raised the prices of goods and services across the board in our country and worldwide. This inflation, caused by many factors, has put a strain on families and I am sure we have all felt it in one way or another. No industry or business has been unaffected. For a long time, inflation was growing at an unsustainable rate. It needed to be subdued. So, what about now?

We talked for lengths last year about inflation and how it was agitating the country. Alex, last June, wrote about the sting that American families were feeling because of this rise in prices. At that time, inflation was at a staggering 9.1% year over year increase. The course needed to be steadied and the trend need to be flattened. In a blog post that I wrote last fall, I talked about the power of Jerome Powell and the Federal Reserve. The main tool that the Fed can use to fight inflation is interest rates. The Feds control the going borrowing rate for short-term loans between banks. This in turn works as a snowball affect on all other interest rates offered by commercial banks. The reason raising rates curbs inflation is that it actually discourages economic growth. Sounds counterproductive, and in a way, it is, but uncontrolled inflation is seen as a bigger issue than a short-lived recession. Recession is often what follows when the fed raises rates. What has our experience been so far?

Jerome Powell and the Federal reserve started their interest rate hikes in March of 2022. The first hike brought the target interest rate from effectively 0% to .5%. Through a 14-month series of rate hikes the going interest rate is now 5.25%. It is interesting how we look at mortgage loan rates and are unsatisfied with how high they are when the previous generation would have been ecstatic to get the same rate. Rates are still low, historically, for mortgages but we most definitely were spoiled for a while. Getting back to inflation, the year over year increase in prices peaked at 9.1% in June of 2022 as the rate hikes were starting to really heat up. Fast forward to now and in April of 2023 the inflation rate was 4.9% which is a .4% increase from last month in March. The Federal Reserve who had been very committed to the rate hikes, has signaled that it may be time to bring them to a pause for now. Rather than the 50 and 75 basis point hikes that characterized last year, hikes so far this year have been 25 basis points. So, the Fed seems to believe that they are getting inflation under control and they do not need to be as aggressive as they were before. Interestingly, the country is doing well economically. After having negative GDP growth in the first two quarters of 2022, the U.S. has not had a quarter of negative GDP growth since. This is despite the rate hikes that would seem to discourage economic growth.

While inflation is still higher than we would like, hopefully this summer will be more affordable than last year for you all. Summer cookouts and family road trips are part of what make the season so fun and they provide memories that us and our kids alike will remember forever. If you have any questions about planning for traveling during retirement and how to save adequately for that type of lifestyle, please reach out to us! We are always happy to help our clients formulate, plan for, and achieve their goals. With that, we will see you all next week!

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