Inflation Basics and Outlook


Last month, we spent some time discussing and sharing some resources centered around retirement. More specifically, what makes for a good, ie. happy, retirement. This month, we are going to focus on something a little more tangible, something that many of our clients have been feeling in their pockets: inflation. 

As sure as the summer temperatures are heating things up near you, inflation has been a hot topic since the beginning of the year. We thought it was a good idea to spend this month discussing inflation to help our clients better understand and cope with its effects. We believe in looking at all things from a position of knowledge. Inflation is scary. It touches all parts of our lives and puts into jeopardy the goals we have planned for and worked so hard to achieve. We hope that in learning about inflation, we can take some of the fear and emotion out of the equation and help our clients make better decisions. 

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First, we want to understand the basics of inflation. What are the main causes of inflation? Cut down to its most basic definition, inflation is the rising cost of goods and services over time. The rate of inflation ebbs and flows and a rate of 2% or 3% are considered pretty normal and manageable. Currently, inflation is over 8%. Inflation is measured monthly using something called the Consumer Price Index which measures the costs of goods and services ranging from housing to energy to food (in and out of home). Different aspects of the CPI experience inflation at different rates and have varying effects on the total inflation rate. 

So, what is driving inflation to these heights? It is generally understood at this time that there are three sectors whose price increases have had an outsized impact on inflation in general. These three sectors are housing prices, energy prices, and used car prices. That may sound pretty dire, right? It depends. If you are one of our typical clients, you already own a home, you have a decent vehicle, and you can hopefully adjust your energy consumption. In the ‘Watch’ and ‘Listen’ sections, we will dig deeper into the housing and car pieces of this trio. If you want to geek out a little more and see how different sectors have been affected by inflation, check out this chart that shows the 12-month percentage change in the CPI by different categories

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Is the American dream dead? If you have been house hunting in the past year or so, you may have a pretty strong answer to that question. All across the country, real estate markets have been hitting all-time highs for both housing prices and monthly rental figures. The dream of owning your own piece of America is becoming more and more difficult for people to achieve. One of the pernicious theories for the cause of this is that hedge funds have been purchasing large numbers of homes to rent out. In other words, Wall Street is using its deep pockets to bid up the prices of homes out of the reach of everyday consumers. This clip from The Daily Show with Trevor Noah dives deep into the controversy using this original NBC piece as its basis. Fair warning: the humor from The Daily Show clip might not be for everyone, so we’d recommend sticking to the NBC link if you like to keep things a bit more PG. 

So, is it true? In a single word, yes. Institutional investment firms, hedge funds, and even retirement funds from abroad are all pumping money into the US housing market. Most of the homes they are buying and converting into rentals are homes targeted by first home buyers in attractive markets such as those in the Sun Belt. A silver lining to increasing inflation is that as the Fed has increased interest rates, it has made access to credit more expensive for these firms which should result in fewer purchases on their part. Time will tell how this plays out. 

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One of the conversations we have frequently had with clients is to discuss the question of whether it is better to fix an old car or buy a new one. This question has gotten even more important these days as used car inventory has shrunk and prices have gone up. In plenty of cases, the cost of a used car is 80% or more than what a person would pay for a new car, so the question of repair or replacement is even more critical. To consider this topic, we like this podcast episode from The White Coat Investor. Cars are extremely personal items for people, but they are also one of the most expensive parts of a household’s financial picture, so their expenditure should not be one ruled by emotion. Overall, we recommend buying cars in cash and only buying what you can immediately afford. If you find yourself in this situation, this Fix or Trade Calculator is pretty fun to play with and hopefully, prices for used cars will come back down to earth sooner rather than later. 

Thank you so much for taking the time to read our newsletter. We hope you’ve found some value here. Please reach out if you have any questions or comments. Share this with your friends and family and let us know if you have any topics you’d like us to cover. 

If you haven’t yet, take a listen to our podcast, The FI Entrepreneur. We’ve been doing it for a few months now and have gotten some good feedback. Ben and Andrew are set to record an episode about how to keep the ‘Freedom’ in ‘FI’ and how to avoid burnout as an entrepreneur, something both of them have plenty of experience with. 

Lastly, we’d like to extend a word of congratulations to our team member Andrew Bencivenga, who was recently awarded the Certified Financial Planner™ designation, an accomplishment long in coming! Andrew also recently celebrated being on the Bona Fide Finance team for 2 years. We are happy to have two CFPs® to lead the charge in serving our client base!

Have a great month and we’ll see you next time!

Best wishes, 

The Bona Fide Family