Rising Inflation

November 2, 2022

Investors Need to Account for Rising Inflation. A good rule of thumb is to assume inflation will be at least 3% every year.

Because rising inflation will impact your long-term retirement strategies, all investors would be well served to understand the latest Consumer Price Index data from the Department of Labor.

Inflation Matters

In simple terms, inflation is an increase in prices for goods and services. Deflation, on the other hand, is a decrease in prices for goods and services. It matters because inflation decreases the purchasing power of your money in the future. For example, if inflation is 10%, then a $1 loaf of bread this year will cost $1.10 next year.

Inflation in the U.S. has averaged around 3.3% from 1914 until 2022 and has averaged about 3.7% for the past 60 years. The annual inflation rate as of October 13, 2022, came in north of 8%, an annual rate not seen in over 40 years.

Watching Inflation

The U.S. Department of Labor Bureau of Labor Statistics publishes monthly measures of inflation when it calculates the Consumer Price Index. On October 13^th, the Consumer Price Index for All Urban Consumers advanced by 0.4% in September. However, the 12-month inflation number came in at 8.2%. The reasons for the significant change are as follows:

The food index is up 13.0% over the last year
The energy index increased 19.8% over the last year
Fuel oil is up 58.1% over the previous year
New vehicles are up 9.4% over the previous year
Transportation services are up over 14.6% over the last year

Accounting for 3% Inflation

The question for investors to think about is not whether inflation will find its way into the broad economy – it has. More importantly, what should an investor do about it? While no simple answer covers every situation, your long-term retirement strategies should account for inflation. A good rule of thumb is that you assume inflation to be at least 3% – its historical average. If you’re wrong and we find that the inflation rate for the next 25 years turns out to be less than your assumed 3%, then the purchasing power of your retirement savings will be more, not less. At Ethos Capital Advisors, Steven J. Toto CFP® can help model different retirement scenarios while accounting for inflation. To find out more information about the ETHOS complimentary and obligation-free financial check-up, contact us at (215) 968-1820 Newtown, PA, or (609) 336-3023 Princeton, NJ.

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