HIGHEST INFLATION SINCE 1981, SMALL BUSINESSES FEELING GLUM, REAL WAGES DROPPING AND LESSONS FROM THE GREAT RECESSION
On July 13th, the U.S. Bureau of Labor Statistics (BLS) reported that the Consumer Price Index (CPI) for All Urban Consumers (inflation) increased 1.3% in June after rising 1.0% in May. Over the last 12 months, the all items index increased 9.1%.
"The increase was broad- based, with the indexes for gasoline, shelter, and food being the largest contributors. The energy index rose 7.5 percent over the month and contributed nearly half of the all items increase, with the gasoline index rising 11.2 percent and the other major component indexes also rising. The food index rose 1.0 percent in June, as did the food at home index."
Worse:
• The all items index increased 9.1% for the 12 months ending June, the largest 12- month increase since the period ending November 1981
• The all items less food and energy index rose 5.9% over the last 12 months
• The energy index rose 41.6% over the last year, the largest 12- month increase since the period ending April 1980
• The food index increased 10.4% for the 12-months ending June, the largest 12- month increase since the period ending February 1981
Here are a few of the specific price increases we've felt over the last year:
HISTORICAL INFLATION
Inflation in the United States has averaged around 3.3% from 1914 until 2022, but it reached an all- time high of 23.70% in June 1920 and a record low of -15.80% in June 1921.
Most will remember the high inflation rates of the 70s and early 80s when inflation hovered around 6% and occasionally reached double-digits. But so far in 2021 and 2022, inflation seems to have gone up every single month – which you no doubt already know – because you're feeling it.
INFLATION: THE RETIREMENT KILLER
Inflation decreases the purchasing power of your money in the future and unfortunately, many don't factor inflation into their retirement plans.
Consider this: at 3% inflation, $100 today will be worth $67.30 in 20 years – a loss of 1/3 its value. Said another way, that same $100 will only buy you $67.30 worth of goods and services in 20 years. And in 35 years? Well your $100 will be reduced to just $34.44.
WHAT INVESTORS NEED TO REMEMBER
Therefore, it is imperative that your long- term retirement strategies account for inflation and that you prepare for a decrease in the purchasing power of your dollar over time. You should strongly consider assuming that inflation will be more than 3% – its historical average.
It's true that inflation today hovers over 8% – quadruple the Federal Reserve's target inflation rate – but a better assumption might be one based on the last 100- years of data.
If you're wrong and you find that the inflation rate for the next 25 years turns out to be 2%, then the purchasing power of your retirement savings will be more, not less.
REAL WAGES DROP
While most media outlets will focus on the increase in the Consumer Price Index, overlooked by many is the fact that wages dropped from May to June. More specifically, according to the BLS: "real average hourly earnings for all employees decreased 1.0% from May to June."
But worse:
- Real average hourly earnings decreased 3.6% from June 2021 to June 2022.
- The change in real average hourly earnings combined with a decrease of 0.9% in the average workweek resulted in a 4.4% decrease in real average weekly earnings over this period
Nominal wage growth has been far below target in the recovery
SMALL BUSINESS EXPECTATIONS FOR FUTURE CONDITIONS HIT ALL-TIME LOW
The day before CPI data was reported, the National Federation of Independent Business (NFIB) reported that its Small Business Optimism Index dropped 3.6 points in June to 89.5, marking the sixth consecutive month below the 48-year average of 98. Unfortunately, it gets worse.
The NFIB found that:
- Small business owners expecting better business conditions over the next six months decreased seven points to a net negative 61%, the lowest level recorded in the 48-year survey.
- Expectations for better conditions have worsened every month this year.
- Inflation continues to be a top problem for small businesses with 34% of owners reporting it was their single most important problem in operating their business, the highest level since quarter four in 1980.
"As inflation continues to dominate business decisions, small business owners' expectations for better business conditions have reached a new low. On top of the immediate challenges facing small business owners including inflation and worker shortages, the outlook for economic policy is not encouraging either as policy talks have shifted to tax increases and more regulations."
OPEN JOBS, NEGATIVE SALES, SUPPLY CHAIN ISSUES, & HIGHER PRICES
As reported in the NFIB's monthly jobs report, "94% of those hiring or trying to hire reported few or no qualified applicants for the positions they were trying to fill."
Further:
- A net negative 2% of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down three points from May. The net percent of owners expecting real sales volumes decreased 13 points to a net negative 28%.
- 39% reported that supply chain disruptions have had a significant impact on their business. Another 30% report a moderate impact and 23% report a mild impact. Only 6% report no impact from recent supply chain disruptions.
- The net percent of owners raising average selling prices decreased three points from May to a net 69% (seasonally adjusted). Price raising activity over the past 12 months has escalated, reaching levels not seen since the early 1980s when prices were rising at double digit rates.
- 4% of owners reported lower average selling prices and 69% reported higher average prices. Price hikes were the most frequent in retail trades (80% higher, 3% lower), transportation (78% higher, 0% lower), construction (75% higher, 4% lower), and wholesale (69% higher, 7% lower). Seasonally adjusted, a net 44% plan price hike
HIGHEST INFLATION SINCE 1981, SMALL BUSINESSES FEELING GLUM, REAL WAGES DROPPING AND LESSONS FROM THE GREAT RECESSION
On July 13th, the U.S. Bureau of Labor Statistics (BLS) reported that the Consumer Price Index (CPI) for All Urban Consumers (inflation) increased 1.3% in June after rising 1.0% in May. Over the last 12 months, the all items index increased 9.1%.
"The increase was broad- based, with the indexes for gasoline, shelter, and food being the largest contributors. The energy index rose 7.5 percent over the month and contributed nearly half of the all items increase, with the gasoline index rising 11.2 percent and the other major component indexes also rising. The food index rose 1.0 percent in June, as did the food at home index."
Worse:
• The all items index increased 9.1% for the 12 months ending June, the largest 12- month increase since the period ending November 1981
• The all items less food and energy index rose 5.9% over the last 12 months
• The energy index rose 41.6% over the last year, the largest 12- month increase since the period ending April 1980
• The food index increased 10.4% for the 12-months ending June, the largest 12- month increase since the period ending February 1981
Here are a few of the specific price increases we've felt over the last year:
ITEM INCREASES
Fuel Oil +98.5%
Gas (all types) +59.9%
Electricity +13.7%
New Vehicles +11.4%
Food +10.4%
Transportation Services +8.8%
Shelter +5.6%
All Items +9.1%
HISTORICAL INFLATION
Inflation in the United States has averaged around 3.3% from 1914 until 2022, but it reached an all- time high of 23.70% in June 1920 and a record low of -15.80% in June 1921.
Most will remember the high inflation rates of the 70s and early 80s when inflation hovered around 6% and occasionally reached double-digits. But so far in 2021 and 2022, inflation seems to have gone up every single month – which you no doubt already know – because you're feeling it.
INFLATION: THE RETIREMENT KILLER
Inflation decreases the purchasing power of your money in the future and unfortunately, many don't factor inflation into their retirement plans.
Consider this: at 3% inflation, $100 today will be worth $67.30 in 20 years – a loss of 1/3 its value. Said another way, that same $100 will only buy you $67.30 worth of goods and services in 20 years. And in 35 years? Well your $100 will be reduced to just $34.44.
WHAT INVESTORS NEED TO REMEMBER
Therefore, it is imperative that your long- term retirement strategies account for inflation and that you prepare for a decrease in the purchasing power of your dollar over time. You should strongly consider assuming that inflation will be more than 3% – its historical average.
It's true that inflation today hovers over 8% – quadruple the Federal Reserve's target inflation rate – but a better assumption might be one based on the last 100- years of data.
If you're wrong and you find that the inflation rate for the next 25 years turns out to be 2%, then the purchasing power of your retirement savings will be more, not less.
REAL WAGES DROP
While most media outlets will focus on the increase in the Consumer Price Index, overlooked by many is the fact that wages dropped from May to June. More specifically, according to the BLS: "real average hourly earnings for all employees decreased 1.0% from May to June."
But worse:
• Real average hourly earnings decreased 3.6% from June 2021 to June 2022.
• The change in real average hourly earnings combined with a decrease of 0.9% in the average workweek resulted in a 4.4% decrease in real average weekly earnings over this period
Nominal wage growth has been far below target in the recovery
SMALL BUSINESS EXPECTATIONS FOR FUTURE CONDITIONS HIT ALL-TIME LOW
The day before CPI data was reported, the National Federation of Independent Business (NFIB) reported that its Small Business Optimism Index dropped 3.6 points in June to 89.5, marking the sixth consecutive month below the 48-year average of 98. Unfortunately, it gets worse.
The NFIB found that:
• Small business owners expecting better business conditions over the next six months decreased seven points to a net negative 61%, the lowest level recorded in the 48-year survey.
• Expectations for better conditions have worsened every month this year.
• Inflation continues to be a top problem for small businesses with 34% of owners reporting it was their single most important problem in operating their business, the highest level since quarter four in 1980.
"As inflation continues to dominate business decisions, small business owners' expectations for better business conditions have reached a new low. On top of the immediate challenges facing small business owners including inflation and worker shortages, the outlook for economic policy is not encouraging either as policy talks have shifted to tax increases and more regulations."
OPEN JOBS, NEGATIVE SALES, SUPPLY CHAIN ISSUES, & HIGHER PRICES
As reported in the NFIB's monthly jobs report, "94% of those hiring or trying to hire reported few or no qualified applicants for the positions they were trying to fill."
Further:
• A net negative 2% of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down three points from May. The net percent of owners expecting real sales volumes decreased 13 points to a net negative 28%.
• 39% reported that supply chain disruptions have had a significant impact on their business. Another 30% report a moderate impact and 23% report a mild impact. Only 6% report no impact from recent supply chain disruptions.
• The net percent of owners raising average selling prices decreased three points from May to a net 69% (seasonally adjusted). Price raising activity over the past 12 months has escalated, reaching levels not seen since the early 1980s when prices were rising at double digit rates.
• 4% of owners reported lower average selling prices and 69% reported higher average prices. Price hikes were the most frequent in retail trades (80% higher, 3% lower), transportation (78% higher, 0% lower), construction (75% higher, 4% lower), and wholesale (69% higher, 7% lower). Seasonally adjusted, a net 44% plan price hikes.
LESSONS FROM THE GREAT RECESSION
After the Great Recession from 2007 to 2009 hit, far too many Americans found themselves without any savings to get through the hardships of unemployment, falling house prices, dwindling 401(k)s and increased financial anxieties. Don't let this happen to you.
Getting into some simple saving habits now can really help you down the line. Social Security and unemployment checks are a lifeline to many, but usually not enough to maintain a decent living standard. The rule of thumb for emergency savings is three to six months' worth of living expenses.
In light of our current economic slump, most financial professionals will tell clients to save even more – at least six to 12 months of expenses. One way to do this is to set up an automatic deduction program through your employer or through your bank.
Make Savings Automatic. You can set up a program that transfers a certain amount from your checking account to your savings. Once established, you can change it, but you probably won't because we are all busy and it's easier to keep things as they are. Also, once you learn to plan your finances around the remainder of your paycheck not transferred into savings, you won't miss the money you saved.
You can also start an automatic increase if you get a raise. This simple strategy is also helpful when saving toward any goal, such as retirement. With a 401(k) or similar program, you can automatically put money away, sometimes with an employer matching contribution.
The government uses this system by withholding taxes. It takes taxes from your paycheck, and you live on the remainder. If you pay into your retirement fund automatically, you can save without feeling that pinch of dread when you pay monthly bills.
Make a Resolution. Write down how much you want to save every month. It helps if you also tell someone about your goal. These two steps may greatly increase the likelihood that you will be motivated to keep working towards your goal. When you have a set goal and a partner to hold you to it, you stay more focused and are less likely to spend money on things that you don't need.
When on a dubious shopping spree, for example, ask yourself, "Is this purchase going to help me or hurt me?" Americans often boast that they are number one in lots of things, but saving the money that we earn would probably be our worst event at the Olympics. American households save only about 4% of their disposable incomes, far less than other developed countries and far less than we should.
We are far better at spending money that we haven't earned yet. The same lack of fiscal probity is evident on the national level. Our national debt is over $30 trillion – which is more than $91,000 per citizen and almost $250,000 per taxpayer!
If there is a silver lining to the black cloud of the Great Recession from more than 15 years ago, it is that it helped Americans to be thriftier, put off gratification and think more about the long-term financial health of their family and community.
People were forced to decline needless, unwise purchases because they didn't have the access to credit they had before. As a result, Americans were paring down debts and saving more money.
Let's get back to that. Before the next recession hits.
Your Financial Professional
Investors need not ponder their worries – rising inflation, pending Fed rate hikes and whether we are headed for a protracted recession or not – alone. With respect to how you invest, the time is right to meet with a financial professional to review current allocations to make sure that your holdings are appropriately diversified and reflective of your risk tolerance and financial goals.
In addition, your financial professional can help you project for inflation as you think about how to invest your money. Finally, your financial professional can help you relate your money to your life work so that you are well-positioned no matter how long (the likely) recession lasts.
FIO–SUMMER–2022
Nothing contained herein shall constitute an offer to sell or solicitation of an offer to buy any security. Material in this publication is original or from published sources and is believed to be accurate. However, we do not guarantee the accuracy or timeliness of such information and assume no liability for any resulting damages. Readers are cautioned to consult their own tax and investment professionals with regard to their specific situations.
Important Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All indexes are unmanaged and cannot be invested into directly.
Past performance is no guarantee of future results.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Inflation is the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.
The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by FMeX.
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