When Inflation Gets Personal
Austin Colby, CFP®, MBA
The Colby family van (affectionately called “the Party Bus”) was recently totaled in a car accident. Thankfully, there were no major injuries to the passengers, but it was a complete wreck of an excellent motor carriage that had faithfully transported my family 130,000+ miles over the past eight years.
An "aspirational" motor carriage for large families - the 2015 Chevy Express
Once the shock of the accident had worn off, I began the disheartening task of finding a replacement.
A 15-passenger van has never been known as an attractive vehicle. I’m pretty sure no one has ever watched my family roll by and thought, “Man, that is one fine piece of steel.” As my sagacious wife once told me, “I don’t even know what the van looks like on the outside when I’m driving around with our special cargo on the inside. I suppose if I cared about the appearance, that would mean, by definition, that I care more about what other people think of my vehicle rather than its purpose.”
I would never have guessed how challenging procuring and purchasing a 15-passenger van was going to be. I very much believe that a joyful heart is good medicine, and this process certainly gave me many opportunities to put that belief into practice.
By the way, smiling is hugely beneficial—scientifically proven, in fact! Try it as often as possible. Below are some quick health benefits:
- Releases endorphins
- Alleviates stress
- Reduces blood pressure
- Strengthens immune system
- Increases endurance
- Reduces pain
- Boosts mood
- Reduces risk of heart disease
- Relieves anxiety
Most often, inflation sneaks up on you quietly: you notice eggs are $0.25 more per dozen, the price at the pump is a bit higher, and you wonder why the budget seems stretched a little thin.
But there are also times like we are experiencing now, where it hits you across the face with a two-by-four.
Below is a list of some of those two-by-fours with which every American has been whacked recently (according to the U.S. Bureau of Labor and Statistics):
- +24% beef
- +26% hotels
- +41% used vehicles
- +39% vehicle rentals
- +50% gas at the pumps
On top of that, if the Federal government reported inflation as it did in 1990, the overall inflation number would be north of 10%. If it used the 1980 methodology, it would be soaring over 15%!
Chart via Blackrock (January 2022)
One of the cruel impacts of inflation is that it is a “bottom-up” tax on Americans, versus a top-down tax (which is how our income tax code works: the highest-earning taxpayers pay the highest tax rate and the majority of the income taxes). Inflation lowers the spending power of the first dollar out of your wallet every month regardless of how much money you earn.
Everyone who eats eggs, drives to work, wears clothes, or tries to replace a wrecked vehicle must pay the inflation tax.
In my family’s case, after searching for six weeks (supply chain issues are an entirely different article that would read about as bleak), we settled on purchasing the exact same make and model 15-passenger van that was three years old, versus the one-year-old van we purchased in 2014.
We ended up paying more than double what we paid less than eight years ago for an older version of the same vehicle.
Reminder about smiling…
Cars do not appreciate in value. They go down in value and only cost you money every day that you own them. In theory, this fact should mean that older vehicles cost less than newer vehicles. However, inflation is working over time to cause your dollar to be worth less. Therefore, it took 100%+ more of after-tax dollars to purchase a lesser-valued vehicle than the one we lost.
Ouch.
So, how to combat inflation from a personal finance perspective? When we experience inflation like this, it is even more imperative that your dollars are working hard for you in your investment portfolio. Because the value of those dollars can experience sharp declines during times of high inflation (like the 5, 7 or even 15% we are currently experiencing), it is even less prudent than usual to have dollars tied up in bank savings accounts, CDs, short-term low-interest bonds, etc. $100 in the bank one year ago only has about $90 of purchasing power today.
One tool the Federal Reserve (Fed) will start to implement to combat inflation is the raising of the Fed Funds Rate. The Fed has indicated these rate hikes will start in 2022 and likely last through 2023, barring any unforeseen changes.
Since 1994, the Fed has raised
rates over four different periods. Below is the performance of U.S. stocks and
U.S. bonds over the following 6 and 12-month periods:
U.S. Stocks 6-months 12-months
Feb. 1994: -2.6% 2.5%
June 1999: 9.0% 8.0%
June 2004: 7.8% 7.5%
Dec. 2015: 1.4% 11.3%
U.S. Bonds 6-months 12-months
Feb. 1994: -2.7% -1.2%
June 1999: 1.3% 5.1%
June 2004: 4.2% 7.1%
Dec. 2015: 4.9% 1.7%
Average U.S. stock and bond performance 12
months after a rate increase:
U.S. stocks: 7.3%
U.S. bonds: 3.2%
While we can never accurately predict where the investment markets will go in the short-term, we do have history on our side—even in times of high inflation and looming interest rate hikes.
As always, we believe that staying optimistic serves you well in the present, and even more so in the future.
When it comes time to replace the next Colby Family Party Bus (out of convenience rather than necessity, we pray) I imagine inflation will be a much different story and the supply chain will be running smoothly again. Regardless of the circumstances at that time, we’ll be choosing to smile through the process.