Unless Your Money Is Beating Inflation, You’re Losing

The following column from Jennifer Pagliara, CapWealth Senior Advisor, appeared in The Tennessean on April 14, 2017. Read it at The Tennessean here.

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Many millennials have known nothing but recession and recession recovery. They’ve never seen wage growth. They’ve never known big life decisions — such as marriage, buying a house or having kids — that weren’t delayed due to insufficient savings. Those who are older have experienced this, too, of course, but they can at least remember better times of economic optimism.

About the only economic curse millennials haven’t endured is inflation. But even that could change now as inflation appears to be rearing its ugly head.

Diminished purchasing power

Inflation is the rate at which the price of goods and services rises. With inflation, the purchasing power of money declines. Many factors contribute to inflation, but one of the basic causes is the economic principle of supply and demand.

There are currently many trends at work that could potentially spell inflation. Many expect a fiscal stimulus to the economy thanks to Trump’s promises on infrastructure spending and tax cuts. Investors certainly believe an economic jolt is coming, as evidenced by the double-digit lift to the S&P 500 since Election Day. Another commonly watched inflation indicator, wages, are also creeping up. Energy prices, which bottomed out last year, have turned around, yet another inflation indicator.

In fact, inflation has already begun. The most widely followed barometer of inflation in the U.S., the Bureau of Labor Statistics’ Consumer Price Index (CPI), reported a +2.7 percent year-over-year rise in overall inflation in February (the latest data available at this article’s deadline), the highest increase in nearly five years. The CPI has now posted +2 percent or higher for 16 consecutive months.

Real-world examples

At 2 percent annual inflation, a candy bar that costs a buck today will cost $1.02 this time next year. While a two-cent increase in the price of a candy bar sounds trivial, inflation affects the price of potentially everything: groceries, utilities, gas, clothing, eating out, a new car, home repairs, rent, travel costs, you name it. It adds up fast.
Inflation even affects what you don’t buy — it affects what you save. At 2 percent inflation, a savings account earning no interest that’s worth $1,000 today will be worth $903.92 in five years. In 10 years, that’s down to $817.07. While inflation doesn’t make the money disappear, it lessens the amount of stuff that you can buy with that amount of money — which is a whole lot like cash evaporating.

At 3 percent inflation, it gets much worse. According to the Bureau of Labor Statistics, thanks to an average annual inflation rate of 2.97 percent, $100 in 1980 is equivalent to $295.63 in 2017. That doesn’t mean your money is worth more: It’s precisely the opposite. What a Benjamin could buy 37 years ago now costs triple. So, had you put that $100 into that savings account in 1980 at the age of 30 years old, you’d now be 67, what many people consider retirement age. That $100 would still be $100 nominally and officially, but now it buys only a third of what it did before — its real-world value has shrunk by two-thirds!

Inflation vs. interest

Inflation is one of the reasons investors invest. Because unless you grow your money ahead of the inflation rate, its value is falling.

I’ve noted in my column before that millennials haven’t sought the services of financial advisers like the generations before them. That’s to be expected, given that they’ve had less investable assets and grown up with the financial crisis and a tepid recovery. But financing long-term goals such as marriage, home ownership, children and a comfortable retirement require knowledge, planning and discipline. The specter of inflation now makes a difficult task even harder. It may be time to get advice from an experienced, trustworthy adviser.

Jennifer Pagliara is a financial adviser with CapWealth Advisors. Her column appears every other week in The Tennessean.