Inflation – It continues to be at the forefront of conversation
We feel it everywhere in our daily lives, but for investors, the big question is how will it impact your overall financial picture?
And more to the point, as the Fed pulls levers to rein-in inflation, what will that do to markets and to consumer debt?
First things, first – with the December inflation reading at 7.0 %, everyone is having 1970s vibes, and not in a good way.
But a little perspective here – the average inflation rate for that decade was 6.8%.
Individual readings were much higher, and it persisted for a very long time. Structurally, everything was different, and by the time the Fed acted in the 1980s, drastic measures were needed.
That’s not likely to happen this time around.
Many of the inflation issues we are seeing today have been caused largely by supply chain issues.
And supply chain issues are resolving, only slower than anticipated.
Core Goods inflation, which is the goods you buy daily, is most impacted by the problems in sourcing, and has experienced the massive uptick.
Core Services inflation, the daily services you may pay for, is still pretty much flat.
This means that a return to normalcy should bring inflation down rapidly.
The Fed has signaled its intentions to get more hawkish on inflation. In practice, that means reversing the measures it put in place early in the pandemic to make it easier for businesses and consumers to get long-term loans.
This is the first step.
The next step is to gradually increase short-term rates.
Are there financial moves you, as a business owner, can make to anticipate the Fed’s changes? Of course.
1. Interest rates are likely going up in 2022. So now may be the time to lock in lower rates and convert your short-term debt to something longer term. Pay down your variable, high-interest credit card debt. Better yet, perhaps refinance this debt into a longer-term loan with lower, fixed interest rates, even if that means a second loan on an asset like your house or business property.
It may even be a good time to take on new debt and reinvest in your business. Just be sure you have a profitable place to invest your loan proceeds.
2. Differentiate between strategic and nonstrategic spending: In any disruptive environment, odds are higher that executives will make choices that may jeopardize the company’s long-term strategy.
It’s not uncommon to make broad-based cuts that are not aligned with the company’s strategy — and as a result, will not maximize ROI nor value in the long run.
3. With inflation still high and liquidity less easy to come by, companies will have a harder time with growth. Many investors are already defensively positioned against inflation at this point in the cycle. Now’s as good as time as any to look across your investments with your advisor to understand how you’re positioned.
As the recovery continues, keeping a long-term plan in place may be the best way to help achieve your goals.
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses, but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
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