Inflation Newsletter 2021

The pandemic is easing, and an economic recovery appears to be underway. Those are good reasons to be joyous and to celebrate. However, an unwanted guest – inflation – has decided to join and spoil the party. In today’s newsletter we will review the latest inflation data, including some of the driving factors and actions you can take to keep inflation at bay.
 
Brief Explanation of the CPI
 
The Consumer Price Index (CPI) measures changes in prices paid by consumers for goods and services. It is based on expenditures of almost all U.S. residents of urban and metropolitan areas. Prices are collected each month in 75 urban areas across the nation, from about 6,000 housing units and 22,000 retail establishments. Each time the same basket of goods and services is purchased. This basket includes food, clothing, shelter, fuels, transportation, health services, drugs, new and used vehicles and other goods people purchase on a daily basis. Each of these categories has a specific weight in the overall basket.
 
A healthy and thriving economy will always be accompanied by inflation. Price changes occur as a result of regular market forces, such as shifting supply and demand, or as result of monetary or fiscal policy. The Federal Reserve’s goal is to keep inflation around 2.0% per year.
 
For you personally, inflation always means an erosion of your purchasing power. The same $100 bill in your savings account will purchase fewer goods and services after inflation has occurred.
 
U.S. Inflation Data
 
In the U.S. inflation has been speeding up in April 2021 as consumer prices leaped 4.2% year over year, marking the sharpest price increase since September during the financial crisis of 2008. The month-to-month gain from March to April was a steep 0.8%. This is the fastest pace of inflation in more than 12 years. See chart “Consumer Price Index Evolution 2008 – 2021” for details.

For you, the inflation rate of 4.6% in April 2021 means you now need to spend $104.6 for a basket of goods and services that cost you $100 one year ago. That is a hefty price increase.
 
Goods & Services Driving Inflation
 
Let us dive one level deeper into the U.S. inflation data in order to better understand which goods and services are driving inflation. The top 2 drivers for inflation were energy and used cars and trucks in the month of April 2021. See chart “CPI – Selected Subindices April 2021” for details.

Energy prices overall jumped 25.1% from a year ago, including a 49.6% increase for gasoline and 37.3% for fuel oil. In May gasoline prices continued to rise again to reach a national average above $3 a gallon for the first time since 2014, according to AAA. Further price increases are likely, following a cyberattack that shut down a pipeline between Houston and New Jersey in mid-May.
 
The impact of inflation on your gas bill is such that if you paid $2.50 a gallon for gasoline one year ago, then you now must pay $3.13 a gallon.
 
The cost of used cars and trucks jumped 21.0% compared to one year ago or 10% compared to last month. The prices of used cars and trucks are not generally susceptible for large movements. Therefore, the latest price increase can be considered very quick, high and unprecedented.
 
This means that the used car market is a currently a seller’s market. If you are looking to sell your used vehicle and you do not need to replace it, then now may be a good time to do so.
Given that your used vehicle was worth $5.000 one year ago, you may be able to sell it for as much as $6.050 now.
 
Other noteworthy items affected by inflation were bacon (+12.3%), men’s pants and shorts (+11.5%) and airline fares (+9.7%). Shelter, which represents the price of purchasing or renting a home, increased by 2.1% versus one year ago.
 
Reasons for Inflation
 
The main cause of the surging inflation in the U.S. is the massive liquidity the Federal Reserve and the federal government poured into the market under a seemingly unlimited easing policy and stimulus package aimed at boosting the pandemic-battered economy. The total assets of the Federal Reserve rose by a stunning 92% from $4.1 trillion in April of 2020 to $7.9 trillion in May 2021. See chart “Federal Reserve Total Assets 2020 – 2021 YTD” for details.

These numbers are likely to continue to rise, considering that President Joe Biden is about to propose a $6.0 trillion budget for the fiscal year 2022. In addition, it is not clear when the Federal Reserve will end its easing policy, as it has announced not to increase interest rates to curb inflation in the short term.
 
Price surges were also driven amid supply bottlenecks caused by a number of factors, from production issues with ubiquitous semiconductors found in electronics (including those found in automobiles), the Suez Canal blockage in March, and the rise in commodity prices, such as copper (+36% vs one year ago).
 
Both factors together have combined to form the perfect storm. Consumers have been given a lot of money to spend, which means there is increased demand, while suppliers are unable to keep up due increasingly more scarce and expensive raw materials.
 
Actions to Take
 
Your cash is most vulnerable when it comes to inflation. Deposited in a savings account or a classic CD, it will lose purchasing power month after month. So, you are better off investing it in an asset. Certain assets protect you against inflation, because the income or return they produce generally move with the inflation rate.
 
One of those assets is gold. You can buy gold, but keep in mind that the current trading price of $1.879 is close to the all-time high of $1.967 recorded on August 1, 2020.
 
Generally, bonds and stocks also protect against inflation. However, bonds currently do not offer interest rates that can keep up with inflation. Stocks are a good option and should be part of any diversified portfolio. Keep in mind that a decision to increase interest rates by the Federal Reserve is likely to send stocks tumbling.
 
Real estate income is another viable alternative that protects you from inflation. We would like to introduce you to an investment in real estate lending, which offers you attractive interest rates above the latest rates of inflation, and thereby not only protects your purchasing power but also increases your overall wealth.
 
Thus, we encourage you to look at the concept of First Deed Lending, which provides you with the advantages of renting, without the hassle of being a landlord. Don’t let inflation become the better of you. This is your opportunity to disinvite inflation from being your guest.