You have seen already, in slightly less than two months, Joe Biden and the Democratic Congress have put America on track for higher inflation. With trillions of dollars in stimulus, and new announcements of higher taxes on the horizon, and a push for a higher minimum wage, inflation expectations have soared.
Expectations for inflation have increased 40% in the last five months, to 2.3% from 1.6% over the next ten years. As Brett Arends writes at MarketWatch, it may not seem like a lot, but if you’re retiring it could make the difference between relaxing on the beach or going back to work. He writes:
Nobody suffers more from high inflation than retirees. Back in the 1970s, it was those in retirement living on fixed income that got hit the hardest as prices rose year after year. The investment returns from their bonds and cash fell way behind. Bonds were ruefully described as “certificates of confiscation.” Every year retirees got poorer.
Could this happen again? Many strategists on Wall Street say no. There is so much slack in the economy, they argue, that there’s little to worry about. And things like fast technology advances, which make businesses more efficient and generally cap prices and wages, will keep prices tame, they say.
Admittedly, when they sound like this they make me think of Leslie Nielsen in “Naked Gun”, standing in front of an exploding fireworks store shouting “nothing to see here! Please disperse!”
And not everyone is convinced. The bond market, for one. Five months ago, just before the elections, the bond market was predicting inflation over the next 10 years of 1.6%.
It may not sound like much in real terms. It’s still lower than the historic average. But it’s a 40% rise in a short time and it’s the highest since 2013.
It means someone holding their money in a five-year CD, or even a 10-year Treasury note, will actually lose purchasing power year after year.
Can you afford to “lose purchasing power year after year?” Not many people can.
If you’re willing to keep working, or live a FIRE lifestyle, inflation may not affect you quite so badly. Many Americans have saved so little, it won’t matter what inflation does, they’ll keep working regardless.
Action Line: That’s why I encourage you to save until it hurts. Put the power of compound interest on your side by saving early, and often. And if you’ve saved enough already, start saving for your grandkids. They’ll thank you for setting them up for a lifetime of compounding.
E.J. Smith - Your Survival Guy
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