Rising Inflation Explained
Al Waller: Well, I don't know about you, but I'm pretty sure I'm not alone in experiencing uber sticker shock in rising prices in terms of the cost of groceries, cost of a fast or a casual dining meal, and especially at the gas pumps.
Just for kicks the other day, I checked Triple A’s average price for a regular gallon of gas in the east versus the west coast – the difference between the two is just staggering. I don't even want to think about what it must be like to own a vehicle that runs on diesel fuel.
Furthermore, what I'm seeing is supported by some cold hard facts. For instance, in April, the U.S. Bureau of Labor Statistics reported that inflation rose 8.5% from March of 2021 to March of 2022 where they cited increases in gas, shelter, and food as the largest contributors.
On that sobering note – Welcome back to ClearPath – Your Roadmap to Health & WealthSM. I’m your host, Al Waller. With me is Catherine Collinson, CEO and president of nonprofit Transamerica Institute®, to talk about inflation – what it is, and what it means for all of us.
Well, Catherine, good to have you here as we have a lot to talk about.
Catherine Collinson: Hi Al! It is great to be back, and oh, we do indeed have a lot to talk about.
Al Waller: Now before we get started, I want to remind listeners that we would love to hear from you and know what topics you’d like to hear more about. Your input is invaluable. Please drop us a line at [email protected].And we’ll do our best to put a related segment together.
Catherine, let’s start with the basics – with you leading off with the definition of what exactly is inflation.
Catherine Collinson: Inflation is defined as a sustained increase in the average price of goods and services over time. I want to emphasize that it measures an average of prices. For example, the recent jump in food prices alone isn’t inflation, but rather, it contributes to inflation, along with the prices of other goods and services that cost more now.
Al Waller: If inflation is measured on this average of prices going up, how do we know when enough prices are rising for it to actually be considered inflation? As I mentioned, it was recently reported that inflation rose 8.5 percent over the year – what goes into the formula?
Catherine Collinson: The short answer is “a whole lot.” The Bureau of Labor Statistics (BLS), measures inflation using the Consumer Price Index, or CPI for short. The CPI measures what they describe as a “basket of goods and services.”
As a researcher, I find this fascinating – each month, data collectors visit or call: stores, hair stylists, airlines, and hundreds of types of businesses across the country, selling everything from breakfast cereal to train tickets to hospital stays. In fact, they actually survey the prices of 80,000 goods and services each month and that data is used to determine the Consumer Price Index or CPI.
Al Waller: That is a “whole lot” of inflation! We’ve mentioned gas, the cost of cars, and unless you've been living under a rock – we have all noticed drastic price increases.
But what's the root cause for inflation to suddenly experience its largest increase in nearly 40 years?
Catherine Collinson: Let’s think about it in terms of Economics 101 – there are two things primarily affecting the increasing inflation rate – that is supply and demand.
We are seeing decreases in supply and at the same time, increases in demand and this is happening around the world. Let’s break it down and talk about the decrease in supply first.
There are three main reasons:
- First, in 2020 – as many of us may remember or may be trying to forget – companies around the world stopped or decreased production due to the pandemic shutdown. Restarting these factories and manufacturing capabilities is a lot more involved than shutting them down, and frankly, production simply hasn’t returned back to normal.
- Second, due to an outbreak of COVID in China in this spring of 2022, many areas there have been on a strict lockdown, including the closing of factories. Without these Chinese exports going to other countries like the US, we are continuing to experience some supply chain issues.
- Third, there is a labor shortage. It’s hard to go anywhere these days without seeing a ‘Help Wanted’ sign in the window. And there’s mixed news here. Hiring has totally rebounded since the big drop in 2020 with the widespread closures across the economy. Right now, as of March 2022, unemployment is just 3.6 percent, compared with 6 percent in March of 2021 and a high of 14.7 percent in April of 2020. You may be asking yourself “How can this be? How can this be so low when there are so many jobs open?” One of the big contributors to this is that many people dropped out of the work force during the pandemic, and they have not come back in yet. Those individuals are not reflected in the unemployment rate. Also, we're reading headlines every day about “The Great Resignation” or “Great Quit.”
So, all of this is impacting the supply and specifically a decrease in supply which in turn is contributing to inflation.
Al Waller: Catherine, nice job of breaking that down for us, as well as our trip back to Econ 101. But I can certainly attest to the need for more workers and not just cafes and restaurants – it seems that practically every business I go into has a “now hiring” sign in the window.
Continuing with our Econ 101 discussion, could you expand on the changes on the demand side that are increasing inflation?
Catherine Collinson: Absolutely, and as we talked about supply – big changes there. There's also been big changes in demand and especially recently – increases in demand.
If we look back to 2020, what happened early on in the pandemic is people stopped spending. People stopped buying things. There were concerns about…well, many people were either laid off or furloughed and waiting for stimulus money to kick in. Spending and demand diminished but only temporarily. That demand has come roaring back.
As the pandemic has lessened and people are starting to return to a more typical routine or lifestyle, demand for many items such as cars, gas, dining out, work clothing – that demand has risen as well.
Another thing that also contributed to demand and actually helped get us through the pandemic were the various stimulus packages which have helped people maintain a certain level of living/buying for their everyday needs.
So, across the board, there are increases in demand and consumers are feeling a bit more financially stable.
Al Waller: Exactly, now what I would like to explore is another current event in the headlines and its relationship to inflation, specifically the war in Ukraine. Would that event be considered a cause of inflation?
Catherine Collinson: Great question – the war may be contributing to it but it's important to underscore it is not the sole cause of it. The things that are really making this inflationary environment are the things that we just talked about with supply and demand.
I do want to comment, though, on a couple of things. As we've all learned, Russia is a large exporter of energy. What is lesser known but we're finding out – and I say that as the general public – is that Russia and Ukraine are large exporters of wheat.
So, the reductions in their exports of global commodities are being felt worldwide in terms of higher energy prices and higher food prices.
Al Waller: So, even without the US importing a lot of either wheat or energy from Russia and Ukraine, the interdependency of the global market for commodities means we still feel those price hikes in the US as well.
Well, we know that inflation is happening and some of its causes – but beyond rising prices, what else does inflation impact?
Catherine Collinson: Well, one of the most profound implications of inflation is, it can impact interest rates. Here's why – when inflation gets to be too high, central banks such as the Federal Reserve in the US will often raise interest rates.
Why, you may wonder. These banks have a goal of maintaining a stable economic environment, including inflation and employment. So, here in the US, the Federal Reserve or the Fed has a target inflation rate of 2% per year on average over time. When it's higher than that, the Fed will typically raise interest rates with the goal of slowing the economy by making money more expensive to borrow and with the goal of bringing back or countering the inflation.
Now in 2022, as we may know, the Fed raised interest rates twice. First in March – by a 25 basis point increase or a quarter of a percent – then in May by a half a percent increase or 50 basis points. They have also signaled that they will continue to raise interest rates to counter the inflation that we're experiencing.
Al Waller: What should our listeners be thinking about with regard to their finances, especially as it relates to one of the topics that's near and dear to us – that's saving for retirement?
Catherine Collinson: I'm so glad you asked this question because we're feeling these short-term impacts of inflation and may not be fully thinking about the long-term, and that is for those of us still in the workforce – our future retirement.
There are important things that we can and should be doing that can help us navigate through this.
The first is review your retirement savings goals. Check your balances. Look at your asset allocation mix – that is how your savings are invested – to ensure that they're still appropriate for your risk tolerance and your years to retirement.
These inflationary times are tricky. If you're unsure how this impacts your asset allocation or your expected returns, it is wise to confer with your retirement plan provider or some other financial advisor to ensure that your savings are well aligned – again, with your risk tolerance, your years to retirement, and your long-term goals.
Al Waller: As we've said here in the past, no one cares or really should care more about your finances then you. It really is vital that you stay on top of your holdings in terms of whether to be looking at other options.
What else should people be thinking about say beyond the saving for retirement?
Catherine Collinson: In the shorter term and in the long term for that matter, there are some important things that we all should be on the lookout for.
I'll start with – if there's some good news in all of this, with the interest rates going up, we should see higher rates on things like savings accounts and certificates of deposit. Not all banks adjust their rates at the same pace, but it's good to keep tabs on what your own accounts are paying. Hopefully, you'll see a little bit of a bump there.
The “bad news” is with increases in inflation – it gets more expensive to borrow money. For example, mortgage rates have already started going up and pretty dramatically. That means, if you're thinking about making a major purchase that you're planning to finance – such as buying a home – the cost of borrowing that money is going up, which means monthly payments would be going up or you're going to have to revisit the purchase price that you feel that you're comfortable that you can afford.
Another area that could get more expensive is credit card interest rates going up. Again, the cost of borrowing money is getting more expensive, so, we should expect to see credit card interest rates going up. If you have a credit card balance and owe money, of course, you want to make sure that you do everything you can to get it paid off as quickly as possible. If you see rates going up, you may want to shop around and see if you can maybe move to a different card at a better rate or find some other way to refinance that debt – easier said than done but something to be on the lookout for.
Then the last thing – this goes back to inflation. We all have to be super savvy shoppers these days. Don't take for granted that what you'll spend today is what it cost yesterday.
Also, put together a budget. If you're really feeling the squeeze. It's important to know areas where you feel you can cut back versus those that are absolute essential necessities.
Al Waller: Indeed. In a similar vein, I've started to scout out gas stations with lower prices because it's really getting expensive every time I want to fill up. I've taken to going to this one gas station that offers me a 20 cent per gallon discount with the purchase of a car wash. Thinking back on it now, I'm not so sure I'm really coming out ahead of this deal, but psychologically, when I see that I'm paying 20 cents less a gallon, it does tend to improve the optics. But seriously, let's turn our attention to those folks who are already retired.
Many of them live on a fixed income and are probably really feeling the pinch of higher prices. Have you got any encouraging news for them as we look ahead at the balance of 2022?
Catherine Collinson: I do think I have a glimmer of encouraging news. I just want to acknowledge how scary and challenging an inflationary environment can be for retirees who are living on a fixed income.
I also want to point out that it's a cautionary tale for those currently in the workforce saving for retirement – in the planning process, to have some contingency plans if we see spikes in inflation in the future – like we're experiencing now. Hopefully, that won't happen.
With that I do have a glimmer of some good news and that relates to social security. Many retirees are relying on Social Security for their income in retirement. And social security has a thing called Cost-of-Living Adjustments, or COLAs. What that means is, in inflationary times when prices rise, the Social Security Administration applies a COLA or Cost-of-Living Adjustment and increases benefit payments.
Later this year, during the time of year when they do that, retirees should expect to see a bump or a bit of a pay raise in terms of their social security benefits – and every bit helps.
Al Waller: Absolutely – thank you for that glimmer. I must say, I'm really glad that we're having this very timely discussion regarding inflation today and its effects on the economy in general. We've definitely covered a great deal of information, but say for those who are interested – where can they find additional resources to learn even more about today's topic?
Catherine Collinson: There are a lot of terrific resources out there. I'll name a few. One is the bank or financial institutions that you're already doing business with – many have newsletters, articles, blog posts, and videos on important financial topics.
Your employer and your employer's resources – if they offer a 401(k) or similar plan or retirement benefit, there's a wealth of resources and educational offerings associated with the plan that can help guide you through this. Many even offer financial guidance, which is something that you may want to consider taking advantage of. Another recent trend among employers is – many are now offering financial wellness programs that help you look at your total financial picture – not just your future retirement. Those could have some very helpful insights.
One other source of information I want to point out – the Consumer Financial Protection Bureau which is at www.consumerfinance.gov has information on everything from mortgages to paying for colleges to payday loans. They also have an array of scam alerts, which we all need to be on the lookout for. They just offer a wealth of personal financial guidance and information and tips. So, check them out.
Then lastly, community resources such as libraries and community colleges, often offer courses, either virtual or in-person. I suggest checking into those, engaging and learning more about personal finance.
As I wrap up this list of possible “go to” sources, I cannot underscore enough how important it is to validate that wherever you're seeking guidance or resources that you're working with a reputable organization. We live in some daunting times as it relates to cyber security and things that are going out on the internet. You just to have to be very careful about where you're seeking information and avoid sharing any personally identifying information – unless of course, it's a financial institution you're already doing business with, you know them, and they know you.
Al Waller: These are just a great list of resources. Any final words of wisdom before we wrap things up today?
Catherine Collinson: I will just share a couple final words of wisdom and that is don't panic. Even though these inflationary times may seem panic-worthy – avoid panicking. The experts predict that this inflation growth will slow in the coming months, but it's important that you navigate through it and stay focused on the long term and what you can do personally to help impact it.
Then Al, again – we talk about this on every show, do your homework. Get involved with your personal finances, learn about your situation, get comfortable with money, and that's going to help you ask informed questions and make better decisions about your financial situation.
Al Waller: As always, sage advice and perceptive observations from Catherine Collinson. And again, Catherine, great having you with us today.
Catherine Collinson: Thanks Al – it was great to be back.
Al Waller: We hope you’ll join us for future episodes. If you missed them, look for previous episodes such as The Power of Hope and The Surprising Benefits of Walking.
ClearPath – Your Roadmap to Health & Wealth is brought to you by Transamerica Institute, a nonprofit private foundation dedicated to identifying, researching, and educating the public about retirement security and the intersections of health and financial well-being. You can find our weekly podcast on WYPR’s website and mobile app, wherever you get your podcasts, and at transamericainstitute.org.
ClearPath – Your Roadmap to Health & Wealth is produced by Transamerica Institute with assistance from WYPR.
If you have comments, feedback, or ideas for future episodes, please reach out to [email protected].
Until the next time, I’m your host Al Waller. Stay safe, be well and thanks for listening.
The information provided here is for educational purposes only and should not be construed as insurance, securities, ERISA, tax, investment, legal, medical, or financial advice or guidance.
