Inflation Questions… and Answers

As a child of the 60’s, I’ve been there, done that and thank you very much, I don’t want to do it again. That’s how many of us  who lived through the 1970s and 1980s feel about inflation. But today’s reality is that your money isn’t going as far as it once did, and you’re probably wondering if the situation will get worse. Since there isn’t a crystal ball to predict what will happen with the economy, let’s focus on what we know. Here are some of the most common inflation-related questions and answers.

1. What’s causing prices to rise?

Several factors have contributed to the price hikes we’re seeing everywhere: the COVID-19 pandemic and related shutdowns; government stimulus payments (i.e. easy money); problems with the supply chain; geopolitical unrest and a tight housing market are all likely contributors.1

2. Will this be the next “Great Inflation”?

Much of how inflation plays out in the economy depends on what’s causing it. And luckily, the root causes of today’s problems aren’t the same as what caused the Great Inflation of the 1970s. Due to the one-two punch of inflation, plus high unemployment in the 1970s, the recovery was slow.2 In 1975, the unemployment rate was 8.5%. And while inflation is high today, the unemployment rate is low at 3.5%.3

3. How can I make sure I don’t fall behind?

The US government has recently announced several options to help you keep pace with rising prices. For example, the IRS increased the taxable income thresholds for seven tax brackets, which could save some people money. The IRS has also announced that it will raise the amount you can contribute to your 401k or 401(3)(b) account in 2023 by $2,000.4

Also, a cost-of-living increase of 8.7% will be sent to Social Security recipients, the biggest increase in over 40 years. These efforts won’t reduce inflation, but they are an attempt to help keep pace with inflation and minimize its impact on your pocketbook.4

By making a budget, and tracking and reducing your expenditures, you can avoid falling behind. Most importantly, make sure your emergency fund is maximized. There’s no escaping the fact that prices are rising across the board, so whatever your emergency is, you’ll have to spend more money to solve it.

4. How long until prices drop?

Price declines can’t be predicted, but there are mechanisms to contain them, like interest rates. To slow the economy and inflation, the Federal Reserve raises rates. The Federal Reserve was able to “break The Great Inflation” using this strategy, and if it can be done under the one-two punch of inflation and high unemployment that occurred in the 1970s and 1980s, there’s reason to believe and we are hopeful it can be done in this current environment.5

And we’ve got another thing working for us in today’s economy – we like to call it the Amazon effect, which is all about price transparency. With the ease of online shopping, you can find the best deal on just about anything, which makes high prices harder to sustain.5

5. Should I make changes to my financial planning due to inflation?

The answer to that question depends on your investment time horizon—and which one of these scenarios applies to you?:*

• I’ll be working for at least another 20 years
  If you still have a fair amount of time before you plan to retire, consider maintaining your position in a well-diversified equity portfolio and continue to follow the investment plan laid out by your financial professional. This strategy makes sense even in a down market because historically equities (stocks) have annualized gains of 7% to 9%. For example, between 1990 and 2020, the S&P 500 Index’s annualized gain was 7.5% (excluding dividends), which outperformed inflation.6

• I hope to retire within the next 10 years
  If you’re approaching retirement, then you have less of a runway to make up for market swings or lost savings due to rising prices. You may consider further diversifying your equity portfolio, and potentially shift a portion of your investments toward annuities. Annuities generally present a lower risk profile and can provide an income stream. Inflation-adjusted annuities, which have variable cash-flows that adjust for inflation, may be another option to consider to further reduce risk as you approach retirement.

• I’m retired
  If you’re already retired, you will likely want to stay in low-risk investment vehicles whose objective is to help your portfolio to continue providing the funds needed to cover your retirement lifestyle. Typically, financial professionals advise retirees to have a mix of annuities and bonds, which are historically low-risk and meet or beat inflation. Inflation-adjusted annuities may also further reduce your risk. 

Even though rising prices may make you question your long-term financial goals, don’t chase performance or try to time the market as these tactics are rarely successful and highly risky. However, now is a great time to review your portfolio. You may find that you already have inflation protection within your diversified portfolio, but you may find it helpful to talk with your financial professional who can provide insight into how inflation is affecting your investments.

6. What should we do about our HOA financials? 

Similar to the answer in the scenarios above, it all depends on your associations “Needs”.

Our Community is relatively new and we don’t anticipate any major reserve expenditures for at least another 20 years

If you have a Reserve Study that the board is satisfied with, the ideal scenario is to coordinate that data with your reserve funds and build a portfolio of safe, secure investments that will coincide with the anticipated timeline of repair, replacement or refurbishments within your community.  The prudent placement of funds into insured or guaranteed investment vehicles will assure your association has funds available when needed in the future.  Even with inflation, having a good foundation to build on is the most important starting point for most communities.

 Our Community is 40 year old and we don’t have fully funded reserves

This unfortunately seems to be the case on a nationwide scale.  Many associations and their respective Boards have tried to keep dues and maintenance fees at levels that, in today’s inflationary environment, have not kept pace with the rising cost of goods and services. 

Our Board refuses to raise the Maintenance Fees, despite inflationary trends 

 In this scenario you are probably in financial trouble or headed towards a special assessment or worse. Talk to a financial professional with experience in Community Association Financial Management who may be able to arrange credit, lending or other short term solutions to assist your community in the interim.  Other than raising dues, special assessments or electing a new Board, this strategy makes sense even in any market environment and fiscal responsibility is just part of the fiduciary duties every board has to its owners.

Our advice… Have a Plan, Review it Annually, be Prudent and Work with Professionals 

*For educational purposes only, not meant as investment advice. Your time horizon, risk profile, and investment needs are unique to you. Please speak with your financial professional before making updates to your investment strategy.

1 Source: “What Is Really Driving ‘Inflation’ Today, Forbes.com, (September 2022).
2 Source: “Lunch Box Stagflation Isn’t Your 70s Style Slowdown,” LPL Financial Research, (September 2022).
3 Source: “The Employment Situation – September 2022,” Bureau of Labor Statistics, (September 2022).
4 Source: “IRS Increases 401(k) Limit By Record Amount As Inflation Surges,” Financial Advisor Magazine, (October 2022).
5 Source: “Expect Inflation to be Contained Long-Term—No Foolin’,” LPL Financial Research, (April 2022).
6 Source: LPL Research, Bloomberg, DALBAR, ClearBridge Investments 6/30/21

This material was prepared by LPL Financial, LLC.

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