Inflation is a silent tax. It’s a tax that policy makers can unleash when they spend money we don’t have.
Regardless of whether it is accidental or on purpose the fact remains it can be devastating. It disproportionately hurts the middle class, working poor and retired folks.
In September we registered our fifth month in a row with 5% plus year over year inflation (CPI). Even when stripping out food and energy the core inflation is for four months in a row over 4%. There are a lot of factors, but this one is the simplest: there are too many dollars chasing too few goods.
It’s not hard to understand if you consider the U.S. Congress sent checks for the better part of the last two years to all Americans who made under $150k household income for married tax filers and $75k for single filers. This was for those who lost their jobs and those who remained employed. Peak unemployment reached 14% during the pandemic meaning that 86% of the country remained employed. That was an increase of income for Americans on the aggregate.
At the same time because of illness, shutdowns, mask mandates, vaccine hesitancy and regulations from state to state, we have suffered a very sizable supply chain breakdown. This has led to a shortage of many things from toilet paper, lumber, cars, and computer chips, etc. The prices of nearly everything is going up. The supply chain issues may take a year or more to resolve.
So, my bet is inflation will persist for a year or more.
$22.8 trillion in interest-bearing non-inflation-protected U.S. government securities. Using 2% as the average interest rate being paid to investors with inflation spiking to 5.4 percent in 2021, the inflation tax will in total transfer roughly $1.875 trillion of purchasing power from businesses and households to the federal government.
But there is more. If your house value goes up, your property taxes go up. In most states you pay sales taxes on the price of nearly everything you buy. Sale taxes go up. You pay taxes for your household energy and utilities like cable and internet.
We are in for a difficult patch, and you may need to pay closer attention to your monthly budget.
Consider a smaller vacation or packing lunches more often rather than eating out and most definitely shop for Christmas as early as you can in case you can’t find what you are looking for with the supply chain problems.
Bryan D. Beatty, CFP® AIF®
The views stated are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.