Ep. 180 – Federal Reserve and Inflation

What exactly is causing the current inflation, and how does it affect your retirement?

The supply chain issues we experienced during the pandemic majorly contributed to the current global inflation we’re now experiencing. The Fed has increased rates on a few major product categories raising the cost of inflation.

In this episode of the Secure Your Retirement podcast, we talk about the cause of inflation, what the Fed is doing, and how you can reduce the impact of inflation on your retirement. Listen in to learn how the Fed is trying to balance the economy to keep it balanced and avoid a crash.

In this episode, find out:

●     How the pandemic supply chain issues led to the current inflation rate.

●     The major categories getting affected by inflation due to supply chain issues and the Ukraine war.

●     How the Fed is trying to balance things to keep the economy moving and avoid a crash.

●     How the flexibility of retirees can allow them to avoid the impact of inflation.

●     Why the Fed is avoiding making the inflation mistake of the 1970s and 80s.

Tweetable Quotes:

●     “A retiree cannot avoid inflation, but they can make some conscious decisions on whether or not they’re going to be fully susceptible to inflation.”– Murs Tariq

●     “Knowing what you can control gives you power.”– Radon Stancil


If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Hers’s the full transcript:

Radon:Welcome everyone to our Secure Your Retirement podcast. We are certainly happy to have you here. We’re going to talk about a topic today that is on the minds of everyone and that is inflation. So I do want to say though, because if you listen to our episode regularly, our podcast regularly, you might say, wait a minute, you guys have talked about inflation before, and we have. We did an episode, episode 164 on June 27th, and the title of that one was How to Plan for Inflation in Your Retirement. So this is going to be almost like a piggyback of that particular episode. So go back and listen to that episode if you’re thinking, how is this going to affect my retirement. Today though, what we wanted to talk about was really kind of walking through this idea of what are we talking about when we talk about inflation? How could it affect your retirement?  
 We’re going to talk about that a little bit. And then would the Fed, what is the Fed trying to do, the Federal Reserve, by raising rates? A lot of times people look at it and go, well, how does that affect this? Or what is it that even means? Because we hear these things on the news, like the Fed is raising rates by a half of a percent or a 0.75 of a percent. Well what does that even mean and why would they do that? So we’re going to walk you through those scenarios, but first, let’s just talk for a minute before we get into the why of what is actually being affected right now with inflation. What are the big key things? So Murs, could you kind of walk us through some of the big items that are being affected right now with for inflation?  
Murs:Yeah, absolutely. And I think just to give a little bit of backstory, because everyone’s like, how is this even possible? Why is this happening? It all goes back to the pandemic and the shutdown. The government shut down in the US as well as all over the world, which led to supply chain issues. You couldn’t get all the materials that we needed to do certain things and everything like that. So it all just started to snowball, snowball. And then on top of that, to keep certain aspects of the economy afloat, led to a lot of government spending and printing of dollars. And ultimately, what that does is result in inflation inflationary things. And so what we’re seeing right now from an what is being heavily inflated or we’re feeling the pains of inflation is in a few major categories. Transportation. So if you go to try to buy a new car, the pricing on cars is some of the highest that we’ve seen in a very long time.  
 And a lot of that it kind of revolves around this idea of supply and demand. There aren’t enough cars available for sale and it takes a lot. The back orders on cars is big, and the back orders are big because there’s not enough manufacturing that’s happening because of supply chain issues. So it all kind of stems back to where are we getting all the pieces to make this product? And if it’s taking too long to make these products, then the demand gets pent up and that’s why the prices are going up. So we’re seeing that in cars, we’re seeing that in groceries. So at the grocery store, the cost of goods have gone up. Again, supply chain issues being the root cause. And then we see it, obviously, with the cost of gas and fuel at the pump. Some of that is because of what’s going on overseas with the war in Ukraine and the cost of oil and some of the things that are going on over there.  
 And then a major one, and it’s a big dollar item, a big ticket item, and so we see that too is over the last couple years, we saw the cost of housing going up significantly and not just in certain areas. Across the board, the cost of housing has gone up. And one of the things was is that rates were really low and people could afford mortgages more than they typically could because of how low rates were. And now the government’s doing things as far as trying to fix inflation and rates are coming back up. So housing from new purchases, from buying a house that’s already there, or even from a rental perspective, all of those numbers have gone up. And typically, housing is a large part of someone’s overall monthly budget. Typically, it’s somewhere in the 15 to 30% of what you’re going to spend on a monthly basis. So if that number goes up, that’s where you’re starting and it becomes a bigger percentage of how much you spend on your bills every single month, that’s where people are really starting to hurt. So a few major categories there on inflation and I’ll pass it back to you, Radon.  
Radon:All right, so let’s talk a little bit about the Fed and what they’re doing and what the goal there is when these rates raise, and then we’ll talk a little bit about the numbers that we’re getting on inflation. So Murs talked about these big ticket items that are being looked at and what weighs us out when it comes to inflation. So what is it that the Fed is trying to do? Simply put, when you take a scenario and you raise interest rates on money that people will borrow, if you raise those rates to where now it’s not as attractive to borrow money, you automatically start to restrict the buying opportunity in these major categories. So you take for example, somebody looking for a new car; if they’re looking at this new car and let’s say that rates have been so low, it’s almost like buying it without any interest rate, they feel more confident, they go out and say, okay, well I’m going to go buy this car. And even the manufacturers, they might have borrowed money to make the car.  
 All of that stuff gets restricted because now none of it is as attractive as it was before. So now what you do is you take away the demand. That’s the goal. The Fed really wants to stop or slow, not stop, slow demand. So now if the consumer said, this is not as attractive as it was before, and they stopped buying cars at the rate they were, Well now, instead of us having a supply issue, a supply issue, you now have more cars than what’s being sold and they start to build up in inventory. When that inventory starts to build up, now what occurs is the car maker says, well, we need to now get these cars off of our lots so that instead of carrying huge profits, maybe they cut their profits down and they start lowering the price of that car.  
 Because if you go back and go to during a pandemic and you think about what car dealers were doing, many of them were putting on and adding on 10, $15,000 some of them in all essence just extra money up and above the normal MSRP of a car because they said, look, we don’t have the demand, we don’t have cars and we got all this demand so we got too much supply, I mean not enough supply, and too much demand, so let’s raise the prices on these cars. But people still bought them because they said, look, I need a car, I haven’t been traveling, I’ve been sitting in my house, I want a new car. So they paid the extra price. So with these interest rates going up, that’s going to hopefully slow that down and reverse it.  
 Now what about on a house? Well, when people were buying houses, if you look at the whole area, if you look all over many different places, not only here in Raleigh Durham area, you go to Texas, you go to California, you could go to Washington State anywhere, and people were paying huge amounts of money above what people were put on the market. They were bidding wars. When you raise interest rates from 3% to 6%, all of a sudden now my confidence is lower and I might go, no, I’m not buying this house. And so now all of a sudden, instead of somebody getting a hundred thousand dollars above what their asking price was, maybe now it comes back to the asking price or maybe even below asking price, maybe where now the buyer is back in control bringing those prices back down. So that’s the goal. Now there’s some concerns here. The Fed is worried, well, not worried, but the Fed has to be careful that they don’t do so much that it makes the economy crash like a hard crash.  
 We hear about this thing called a soft landing. What they want is they want it to pull back but kind of have this soft landing and then the economy is still moving. Sometimes though, when you raise interest rates like that, you could just plummet the economy, and that is this whole balance that this trying to be done. So how that plays out, we don’t know yet. We do know that the Fed is extremely concerned about not having this extra high inflation. So that’s why you hear these numbers. We’ll see how that plays out. Now I would do have a question back to Murs on this though. Murs, when we look at those big ticket items like a house, we talked about that, cars, gas, transportation, and then we got food, out of that category for a retiree, what are they able to do that maybe a non-retiree is not able to do?  
Murs:Yeah, and what’s nice about the retiree is that they can not avoid inflation, but they can really make some conscious decisions on whether or not they’re going to be fully susceptible to inflation. And what I mean by that is a lot of times when someone has approached retirement, they’ve already got a lot of things figured out. They’ve already got their house, they’ve already got the cars they’re going to need for a little bit, and so for them, it’s a decision of, well, maybe we won’t buy another car this year, or maybe we’ll hold onto this car for a couple more years until some of this goes down. When it comes to travel, although we do want to travel in retirement, the retiree that is not really tied to a nine to five work week or tied to kids being in school, they can travel whenever they want.  
 So it’s more of do we need to go on this trip this month or can we wait for pricing to come down? Can we wait another year and then we’ll have an even better trip knowing that our dollar’s going to go a little bit further. So the flexibility of the retiree or someone that’s not tied to a schedule work week or a lot of times when you’re working and you want to travel with your family, a lot of times that’s during the most popular months, which is the summer months when the kids are out of school or during the holidays, and that’s when everyone travels. That’s where inflation hurts the most because that’s the only time that people can actually do it. So again, the retiree’s not really tied to those certain things and they’ve got flexibility and they have the ability to make a decision. Do we actually need this year or can we wait another year and see how pricing goes down or up?  
 Food is really the only one that everyone needs. Everyone needs food. You got to go to the grocery store. So yeah, the retiree’s going to feel that. But again, it could be they focus more, they change their shift, they shift how they’re getting food and maybe we don’t go to restaurants as often. We have the ability to cook. So while the grocery bill’s a little bit more than it has been, we’re not eating out as much because we have time to do that, and we have time to make a meal versus going out, whereas maybe the working family doesn’t have time to make the meal or time to go to the grocery store. So they are subject to inflationary items when it comes to that as well. A quick note on inflation, we talk about this all the time and when we’re building out these retirement financial plans that we do for all of our clients, we do take inflation into account.  
 And what Radon was saying about the Fed and the Fed wanting to be very consistent and aggressive with how they want to tame inflation, one of the stories is back in the seventies, we had a high inflationary type of arena and the fed was a little bit, if you want to say, wishy washy on how consistent they were going to be on raising interest rates. So they would raise them, then they would cut them, then they would raise them, then cut them. What that led to is 10 years, a full decade of high inflation. Some of the numbers in the seventies, inflation was anywhere from, in 1970 it was 5.6%. Then in ’73, it was 8.7, and ’74 was 12.3. Then it started to come down, but then it went right back up. In ’78, it was nine again, in ’79, it was 12 and a half, or sorry, 13.3.  
 And then in 1980, it was 12 and a half. And I’m sure a lot of you listening lived through that. So you remember the seventies and how inflation was all over the place, and the Fed has made a stance that we’re not going to make that mistake again. And so while it’s going to hurt some people, while it’s going to hurt the economy in the short run, it’s going to be better in the long run if we can get inflation under control. So all that to say, we take inflation into account when we’re building out these plans. If you take some of those numbers that I just listed off, if you take the last 108 years and you take an average of those high numbers, average numbers, low numbers, and even deflationary numbers, that average comes to about a little bit over 3%. And so when we are running inflationary numbers, we’re going to kind of stay in that same ballpark going off of 108 year average and not just a one year average of, say, last year and 2021 where the inflation was at seven. We want to go off of history because the way inflation works, the reason that the Fed is in place is to get things back into balance. So yeah, we’ll have high years, we’ll have low years, but we’re always going to come back into some type of balance and that’s what the Fed is going to target.  
Radon:So the one thing is when we run the retirement focus financial plan, sometimes people go, well, let’s raise the rate to 5%, 6%, 7%, whatever it is now. That’s really not the right way to do this. If you said, hey, you know what? My grocery bill is running me an extra three or $400 a month, well then let’s just raise your spending need to three to $400 but run our inflation at three, because this idea that we’re going to have 6% inflation for the next 30 years is not realistic. And a lot of times we’re running 30 year plans, so we don’t want to overdo it. What we want to do is say, look, if you feel that you’re spending a little bit more money right now, let’s raise that up, get our baseline up, and then inflate that by 3%. Because really this bump of where we are right now is very much probably a bump.  
 It’s a bump up in pricing, and then we’ll have level off after this if the Fed will continue their action. We just hope this has given you a little bit of insight, a little bit of understanding, maybe helped you think it through in a different way. And by the way, on those things that Murs talking about that you could do, could cut back on, travel, could cut back on how you eat out, we’re not ever telling somebody that’s what you need to do or should do. We just want you to know you have that control. Sometimes those controls make you feel more confident because you can know I can control it. Not that you’re going to have to do that for the next 10 years, just that you can do it. Knowing what you can do gives you power.