Inflation is coming, which sounds eerily similar to House Stark’s refrain in my favorite show, Game of Thrones, that “Winter is Coming”. In many ways, it’s a reasonable metaphor. 

Inflation is a topic that has caused many individual’s eyes to glaze over in recent times, which isn’t surprising considering nearly half the current U.S. population was not even born when inflation skyrocketed to 14% in the 1970s. Learning what inflation means and experiencing how impactful it can be for their financial well-being will be a first for many Americans.

Inflation is now coming back for a variety of reasons. Whether you endured the Great Inflation in the 1970s or if you are just learning about it now, its significance should not be overlooked. Complacency may leave you unexpectedly exposed to significant negative implications.

What is inflation risk and how does it affect me?

Simply put, inflation means that a good or a service costs more today than it used to in the past.

Remember when the yearly average price at the pump was below $1.00? The year was 1988, and it cost roughly $0.90 per gallon (the average Super Bowl advertisement at the time was $645,000, compared to $5 million this past February). Today, the national average for regular unleaded is $2.83. Of course, there are many forces at work that have influenced the price of gasoline, and Super Bowl advertisements for that matter. The takeaway is that accelerating inflation means higher prices for everyday goods and services. Think of gasoline, groceries, medicine, child care and college tuition to name a few. The risk of inflation is that growth of your personal income and retirement benefits may not be keeping up with the accelerating pace of rising prices. In today’s inflationary environment, you are already losing money in your wallet for approximately half of the items that compose the typical U.S. consumer’s budget (according to the Bureau of Labor Statistics – BLS).

For example, the cost-of-living adjustment (COLA; helps to offset inflation) for Social Security benefit recipients is not expected to keep pace with the projected price increases this year for many goods and services. The 2018 Social Security COLA is +2.0%, which compares unfavorably to the BLS’ 2018 forecast of +11.1% for gasoline and +4.3% for airfare. The average college tuition and fees have increased by +8.0% over the past five years, while long-term care costs grew by +4.5% in 2017. According to the National Association of State Retirement Administrators, many state sponsored pension plans have reduced COLA benefits for newly-hired employees since the 2008/2009 Financial Crisis and over 25% of current plans do not even provide a COLA. Savings accounts provide little help, with the most common before-tax interest rate paid sitting at less than 0.1%.

While you may not “feel” the dynamics of inflation on a daily basis (picture cringing at the thought of “surge pricing” from a ridesharing provider like Uber or Lyft), over time, the compounding nature of inflation can erode your wealth. Let’s say you are 30 years away from retirement, and you estimate you’ll need $1.0 million to comfortably support your lifestyle needs. Assuming annual inflation of +2.5% (similar to this year’s forecast), you’ll actually need approximately $2.1 million in 30 years to equal what $1 million is worth today.  That is the real-life impact of inflation.

Why is inflation forecasted to pick up?

Looking forward, inflation, as measured by the Consumer Price Index (CPI), is expected to accelerate from low levels now to +2.4% by year-end. Headline inflation is forecasted to pick up this year for a multitude of reasons. The growth outlook for the U.S. economy remains solid (more growth equates to more consumer spending, and higher prices), trade policies may weigh on imports (implies higher prices), and the recent corporate income tax reform could spur business spending activity.

Your personal inflation gauge may be higher or lower than the headline rate, depending on your lifestyle and spending needs. For example, if you enjoy cooking at home, your food cost inflation will be approximately +0.4% this year, compared to +2.5% if you prefer to go out to eat more often. On a more granular level, if you bought cakes and cupcakes in March, you likely experienced inflation of +0.7%, whereas if you bought cookies, you benefited, as cookie prices generally dropped by -0.8%. The point is, inflation is relative.

What can I do to protect myself?

Depending upon your unique spending habits, which our planning group prudently analyzes for our clients, a thoughtful investment approach to combat inflation erosion may make sense for you. By reviewing cash flow and spending within the context of a client’s short-term needs and long-term financial goals, we can employ investment strategies specifically designed to protect each of our clients’ wealth from the negative effects of inflation.

Interested in learning more about our inflation planning or our investment management process? Click here to reach out to our investment department with any questions you may have.

Chase D. Conti, CFP®

Senior Investment Analyst

Hall of