Following the Covid-19 Pandemic, I started to notice higher prices of goods at some of my local stores. At first, I believed this to be because of how hard small businesses were getting hit by the pandemic with an estimated 100,000 small businesses shutting down permanently. However, we now have a vaccine and with life going back to normal why can I still see the price increase in goods and services?
Yes, this may have seemed pretty obvious but the reason we are seeing these price increases in goods and services is due to inflation. The Inflation rate in April has accelerated at its fastest pace in 12 years with CPI increasing 4.2%.
So why has inflation been increasing so much in the past year?
Well, one big reason for the massive increase of inflation over the past year is because it was about this time a year ago when the United States was hit with the Covid-19 pandemic and during that time inflation rates were unusually low. Another believed reason is because of the massive amount of money that the government has been giving out from stimuli to the increased unemployment benefits.
The Federal Plan
The Federal Reserve’s plan with inflation is to let it run its own course through 2021 because the Federal Reserve actually has the tools to stop inflation just in case it starts to get out of hand.
You might ask yourself what tools does the Federal Reserve have to fight inflation?
Well, one of the biggest tools that the Reserve has at its disposal to fight inflation is to increase interest rates to slow the economy down bringing down inflation. There are also 3 other tools that the Fed has to fight inflation which include manipulating Reserve Ratios, Discount Rates, and Open-market operations.
As of now, the Federal Reserve has made it clear that they have no plans to raise interest rates in the next few years following the pandemic. The Fed is holding on to the belief that the inflation rate we are seeing now is only going to be temporary even though we have seen the most economic growth in nearly half a century.
For the average American inflation might not seem like it would affect them too much because the price of all goods is going up, meaning that the price you work for will likely also go up with inflation.
Well not exactly even though the price of goods has been increasing recently we have yet to see a correction made in salary with wages staying about the same.
So what exactly are the various ways that we can see inflation affect the average American’s life?
The first one being that when inflation increases we see an increase in the price of goods as well-meaning that the same amount of money cannot buy as much as it once was making it less valuable and causing and causing loss of purchasing power. Inflation also lowers the value of pensions, savings, and treasury bonds which are the three main places that most Americans invest and save their money without getting into stocks or housing markets.
The first thing that you need to know about inflation in relation to the housing market is that inflation does not cause a property to increase in value directly. Appreciation is based on demand and does not depend on a currency’s inflation or deflation. There are years where we can see homes appreciate in value more than the inflation rate or vice versa.
While inflation is not directly related to a property’s future valuation it can still increase the value of the property through rent. The reason that rent can increase your property value is that when rent increases it creates a higher ROI and higher “cap rates” leading to an increase in the value of the property.
However, inflation can also have negative impacts on the housing market. We can see an increase in the cost of home construction because of the rise in materials such as bricks and wood and we even see an increase in the price of labor to construct the house. We can also see a decline in financial home purchases because when inflation rises it causes money to become more expensive to borrow and so we see that people instinctively borrow less money. This results in a chain reaction in the housing market with fewer financed home purchases which will stop our economic growth.
This is what you need to know about the recent price increases in goods across the United States. First and most importantly is that the recent increase in inflation should only be a temporary sign of growth according to the Fed and even if it is not temporary we have tools to slow it down. With the higher inflation the average person who is not invested in stocks, businesses, or the housing market will only lead to negative effects resulting in their savings and real wages falling. But, for someone who owns investment properties, they can simply change with the economy, and with this area of high inflation, we can already see landlords start to raise rent which in return can but not always will increase the value of a property.
To keep your savings from losing value due to fluctuations with inflation you should buy investment real estate. With Investment real estate you can react with the economy by changing what you charge for rent which is why real estate income is the best way to hedge against inflation in a portfolio.