What is the Current Inflation Rate in 2021?
Inflation is here. I might even suggest that inflation has been here for the past year or so. However, inflation is just now starting to show its true colors in the data we all see. So, what is inflation, and what is the current inflation rate in 2021?
All about inflation and the current inflation rate for 2021
Inflation is that very subtle, hidden, silent killer. We hardly ever notice inflation as we are dealing with it, but one day, we find ourselves at the movie theatre realizing we just paid $20 for the same movie ticket that cost only $5 just a few years ago. This phenomenon is inflation. The best way to describe inflation is that too much money (demand) is chasing too few goods (supply). Although we have all felt the impacts of this silent assassin, inflation has enormous impacts on your planning considerations. It may also dictate a change in investment strategy to manage an inflationary period. Currently, in August 2021, the most recent inflation numbers we have seen would suggest an annualized inflation rate of near 6%, significantly higher than the growth that the cost of living has been experiencing in recent years.
Did you know taxes are one of the largest retirement expenses?
For long term tax planning strategies that you can implement today, claim your FREE copy of Brandon’s book, Retire by Design!
Is inflation good, and what might it mean for me?
There are two factors at work in the inflation we are experiencing today. The first is the money supply. We have seen the number of dollars circulating in the U.S. increase by about 25% in the past year alone (2020). This increase was primarily due to COVID and corresponding policy. When we see such a significant increase in the money supply, inflation is sure to follow. Inflation follows because there is now significantly more cash in a system that is still producing near the same level of goods. And this means only one thing-- the cost of those goods must come up to reflect the dollars in the economy.
For even more insights into inflation in 2021, tune into this podcast episode
In the episode, my business partner, Adam Laibson, and I dive into whether inflation is good or bad, how to protect yourself from it, and much more.
The second factor at work is the supply challenges. When you shut off this giant machine we call the global economy, we can't simply turn the switch back on and expect everything to pick right back up. The supply chains in our economy results from decades and centuries' worth of systems and processes. When we turned the economy back on, some of these systems may take some time to kick back into full gear. As a result, the supply cannot keep up with the demand, leading to higher prices as more people and more dollars are chasing fewer goods.
Are you making a critical retirement planning mistake?
To learn retirement distribution strategies and develop a thoughtful income strategy, click here to claim your FREE online course!
Where should I invest during inflation? And what should I avoid during inflation?
So, what can you do now that you know the current inflation rate in 2021 to better prepare for the challenges ahead of us? The first thing is to position your investment portfolio to handle this inflationary environment. If you are sitting in cash and inflation picks up, you will find yourself going backward even further every year as the silent killer of inflation slowly eats away at the power of your dollars. So investing is critical during this period. Equities (or stocks) generally give us the best opportunity to keep up with inflation and experience growth that may exceed the inflation impacts over time. There may be certain areas that do better within equity investments as well. When prices go up, families may skip the luxuries, for instance, buying a nice pair of shoes, but will always need food on the table.
Other stocks or hard assets such as real estate and commodity investments typically do well in these markets. Often, traditional bond investments are an area to be cautious of because as inflation rises, typically, interest rates follow. This rise usually has a negative impact on bond prices. Meaning, when interest rates rise, bond prices fall.
What can I do to protect myself from inflation?
Another consideration when making adjustments is ensuring your financial plan incorporates higher inflation rates. Hopefully, the assumptions you have set include periods of higher inflation, which should help ensure that you don't find yourself forced back to work at 80. Often if the inflation assumptions in your planning were too aggressive, such as low inflation assumptions, you might find the plan falls apart in a period of more extended, higher inflationary periods.
Clearly, we have a lot to consider during periods of higher living costs and an increasing inflation rate. In 2021, we find ourselves in one of these periods, and although you may hear expectations of short-term inflation, nobody knows how long this may last. So, preparing and setting yourself up to be in a more opportune position is critical. Use this as a guide and reach out to us today to be sure you can prepare for this period of higher inflation ahead.