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Enduring Rising Inflation Costs

May 2022

Enduring Rising Inflation Costs

Matt Wagner, Chief Practice Officer

Over the past twelve months, prices have risen rapidly at a pace we have not seen in decades, so it shouldn’t come as much of a surprise that the number one current economic concern is increasing prices. A recent Gallup poll found that 17% of Americans are calling inflation the “nation’s most important problem” — and it doesn’t appear to be easing up anytime soon. From gas and energy to food and service providers, nearly every category has increased month over month.

A year ago most of us thought inflation was a short term phenomenon — transitory. Today, there are areas where inflation has tamed, including shipping costs, steel, and paper. However, recent events appear to have made things worse. Lockdowns in China from COVID are causing new supply chain issues and commodity prices are increasing from the war in Ukraine. After an 8.5% increase in consumer prices, the Producers Price Index (PPI) for March came in at an astounding 11.4%. About half the PPI increase was due to rising energy costs. As a result, inflation does not appear transitory to consumers or business owners and it is not likely to subside quickly as solutions to supply issues and an increased availability of commodities does not seem near.

For many wage earners and savers, inflation has become a particular concern as pay increases have yet to match the higher cost of consumers’ expenses. We are getting used to higher gas prices, restaurant bills, and price increases from our service providers. This increase is forcing consumers who were maximizing their spending to make different decisions so their money can stretch further. Those consumers who were spending beneath their ability have the luxury of maintaining their lifestyle, although at a higher consumption rate, which may reduce savings.

Most businesses are adjusting their prices and updating their models to counter the impact of rising costs. Once planning for inflation becomes part of the regular corporate forecasting cycle, it’s much harder to tame — and it all relates back to supply and demand, which is why recent supply chain issues have only exacerbated the rising cost of goods and services. As soon as supply chain issues and access to basic inputs improve, many believe today’s inflation will return closer to normal.

When Supply Can No Longer Meet Demand

If inflation were to continue for an extended period of time, consumers might accelerate purchases on high-demand items out of fear that the price will be higher if they wait. This can, in turn, pull forward future demand into the present, potentially compounding the problem. The housing market is a great example of this. The demand is exceeding the supply. Even if the supply is modestly below demand, it can create a fervor that drives prices up. New homes averaged $391,900 in 2020. Today, that number is closer to nearly $454,000.

The impact of inflation is also felt on the supply side of businesses from a different perspective. Input supply issues and lack of labor can impact a company’s ability to deliver on time and keep costs low. The inflation we are experiencing is driven by demand exceeding supply in areas like housing and consumer goods. A lack of supply is impacting businesses and commodity prices even though demand is only modestly higher. When high demand resources are scarce, people accept the need to pay a higher price. When normal demand is applied to a short supply, people are forced to pay a higher price often against their will or go without. This second scenario creates less consumer satisfaction. The same can be said for almost anything on the market today.

Ways to Prepare

Fortunately, both consumers and businesses can take steps to help combat the rising costs associated with inflation. Most are relatively easy to employ and often start with the following:

Reevaluate your budget.

Whether for personal or business matters, it’s become more important than ever to understand your spending habits and what is driving your costs. Review all of your expenses and begin categorizing each as either a “necessity” or “nice-to-have.” Reevaluate your budget regularly, as you may need to cut additional line items should inflation continue to push prices up.

Confirm your strategic goals.

Although inflation is likely putting into question certain goals, you still should be making some progress toward the future. Reassess your priorities and ask yourself whether your current spending habits support your financial goals and values. Where do you want your money to go? Answering this question can help prioritize spending on what’s of most importance to you.

Opt for more affordable options.

With inflation eroding your purchasing power, you have a decision to make: Prepare to pay more or change to more cost-effective alternatives. At home, this could mean trading out beef for pork, getting rid of certain subscription services, or making your errand runs more productive. At work, it could mean challenging team members to find ways to work more efficiently, rethink how work is done altogether, or automate the most repetitive tasks. While certain aspects of this will tie back to your budget, it's more about understanding the biggest costs in your household or business and being more mindful about what creates real value for your family or your business.

Optimize investments.

Investors notoriously shift their portfolios at the wrong time. Likewise, a company’s plans to starve investments critical to their long-term objectives may backfire. While keeping an eye on your financial goals and values, make incremental shifts that can impact outcomes. Investing in companies that provide or have pricing power can help fight inflation. For investors, this includes many stocks, but direct real estate investments are often better since rents can and do adjust with inflation. Business owners should consider buying a facility that meets the needs of their business to help control facility costs over time.

Inflation is inevitable. It often happens when supply can no longer meet demands, and recent events have only complicated the current situation. Even if costs weren’t on the rise, it’s always important to reevaluate your budget and determine whether your spending is in line with your personal or business goals. Fiscal responsibility is ours to own. Please reach out to us with any questions or for further discussion.

Matt Wagner offers our clients a holistic view of their financial picture and an unbiased analysis of strategies available to them. He provides guidance from an investment, estate and tax perspective, helping clients to connect all the facets of their financial portfolio.

Matt Wagner Headshot
Matt Wagner
Chief Practice Officer
Trust & Family Office Advisor

DISCLAIMER: This newsletter is intended to provide thought-provoking commentary. The information presented herein has been obtained from and is based upon sources and vendors deemed to be reliable, but may be incomplete. Parkside Financial Bank & Trust does not itself endorse or guarantee, and assumes no liability for, the accuracy or reliability of any third party data or the financial information contained herein.
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