Money Monday: Inflationary Times and Terms

Benjamin Franklin on a 100 us bill with a black eye. The concept of the economic crisis in the United States. Inflation dollar. Refusal of international dollar settlements
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Today’s Money Monday shines a light on a term which has found common place in our financial vernacular over the past three years and that word is inflation . On April 26, 2024 the Bureau of Labour and Statistics reported that the current rate of inflation is 3.5% and that inflation increased by 0.4 % from a month ago. But most of the attention is given to the impact of inflation on our daily living consumer expenses and not enough on the rest of our finances. But what does inflation mean and how should we make sense of this monthly news information or reports from the government, since all we know is that prices we are paying for items are increasing weekly?

What’s Inflation?

I’m from the school of keeping it simple and therefore I would suggest to you that inflation is nothing more than the rate of increase in prices over a period of time. In short it is the increase in the cost you may pay for the same item in the grocery store each month. What is not explained is that we have always, for the most part, lived with inflation.

The Federal Reserve and others have always acknowledged that a certain percent of inflation is good for us. That number seems to be around two Percent (2%). However, when prices rise or inflation is above that benchmark, we start taking notice because that’s when investors and financial heads start taking action.

What do I mean by pay attention? Here’s what I mean. There are certain stocks or investments that historically perform well during higher inflationary times. These include residential real estate, which you own directly and is not in a real estate trust. Also energy stocks, trusts and Treasury inflation-protected securities, also do well.

Note, in this discussion of inflation, that inflation is only part of the “ flation” story. There are other types of “flation” that impact your money. 


Disinflation

Disinflation occurs when the rate in the increase of inflation slows.  Said differently, when prices are still increasing, but now at a much slower pace, that’s disinflation. You can probably define our current state of the economy in this way since prices are not increasing rapidly. When inflation turns into disinflation but not deflation or “no flation”,  it means that commodities that have traditionally done poorly during those periods in the past will probably do so again and therefore, you might consider other options in your investing. It has been shown from the past that during disinflation, purchasing stocks in growth-oriented companies generally get rewarded. For example, the growth oriented Nasdaq Composite index,  a group of stocks that focus on, or are comprised of more technology stocks or are in the technology sector, performed better than the S&P 500 ( Standard & Poor).

So, looking at your investments or where to put your money during this change with inflation is worthy of consideration.

No Flation

This is described as a place where inflation is around two percent ( 2%) annually. We are not there yet but if the Federal reserve could manage to figure out the right combination, then the financial world would be perfect. During these times, most investments and markets provide a good rate of returns. For example if you consider the years 2013 through 2019, the S& P index gained an annual rate of return on investments of 13%. Let’s see if you will return to those glory days again.

Takeaways

  • You should know that when you hear “inflation” it means more than your grocery bill, gas prices and rent or mortgages are increasing.
  • Also, as the monthly rate of inflation increases or decreases, you should check in on where your 401 (k) or 403 (b) retirement fund investments stand in relation to these changes.
  • Finally, inflation is just one part of “ flation” which includes disinflation, deflation, stagflation and no-flation.

WHAT’S UP!

Today’s What’s Up is about getting as financial mentor or coach. If you are looking for a financial coach or mentor here are three questions I need you to ask yourself.

  1. What‘s my level of accountability? Most of us want information and advice, but struggle with being held accountable .
  2. Secondly, which teaching style fits you best? There are some people who are very knowledgeable but cannot communicate . How you learn and what works best for you is a critical element in this process.
  3. Finally, determine what character traits or values are you looking for in a coach. Assuming you have figured out at least those questions, then you can begin to move forward in becoming a better steward if your resources. And that’s what’s up!
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