Warren's Theory of Relativity

Warren Ward |

While Einstein’s theory may be somewhat better known, mine has the virtue of simplicity. His requires a lifetime of study for complete understanding but mine is basically intuitive: sixty. That’s right sixty, well actually, sixty degrees. In the summer, sixty feels so chilly that you need a jacket; in the winter sixty is so warm that it tempts you go outside without one. It’s all relative.

Of course, there’s a financial planning insight to be shared here and today’s relates to inflation. Following the extremely inflationary period when money was poured into our COVID-impaired economy, the Federal Reserve began to increase interest rates. This makes borrowing more expensive, which encourages people to spend less, thus reducing upward price pressure. Although the Fed has an imperfect set of tools available, it is charged with managing inflation while providing full employment. This requires a balance between slowing rampant inflation while not putting people out of work – sort of like finding the mythical unicorn.

The word ‘recession’ is used frequently but it may be worth noting that it has a specific definition and can only actually be ‘called’ by a somewhat obscure organization known as the National Bureau of Economic Research. I wrote about all this a year or so ago and you’re welcome to follow the link if you want a refresher. That group tracks inflation using not our country’s Gross Domestic Product but its Gross Domestic Income. That sort of begs the question of what inflation really is – it means different things to different people.

The Consumer Price Index is one popular measure. It has been falling for over a year as interest rates have increased, from around 9% in June of 2022 to 3% a year later. This suggests that the Fed’s strategy is working, although since this past June, the CPI has risen for three months in a row: September’s figure was 3.7%. The CPI is the total price of ‘a basket of goods and services’ often purchased by consumers. It includes gasoline, the most volatile commodity of all. Taking that number out, other prices have generally continued to moderate. Rather than there being a simple ‘one size fits all’ measure of inflation, I think all experiences of inflation are situational.

If you are in the market for a home, mortgage interest rates are going to be critical to your perception of inflation – a high loan payment is absolutely going to affect your spendable income. If you’re living in a home that you purchased more than a year ago, your monthly payment probably hasn’t changed, so you may be feeling somewhat sanguine. If you commute to work from another town, gas prices are something you think about every day. If you have a short commute or are retired, maybe not so much. If you’re a renter, rates have begun to soften a bit, perhaps making life somewhat easier.

Ours is a hugely complex economy with numerous moving parts, so it’s nearly impossible to predict whether a high level decision by Congress or the Federal Reserve will influence the personal financial decision by a family of whether to go out for dinner or eat at home. Still, a couple of trends appear to be revealing themselves. First, both the economy and inflation are slowing, so the Fed’s increase in short-term rates has generally been accomplishing its goal. Second, Baby Boomers have become a very reliable spending engine to keep the economy in motion.

By now, Boomers generally own their homes, so usually have spendable income available. In fact, while making up less than 17% of the population, they account for about 22% of all spending. The Fed estimates that Boomers own over $77 trillion (yes, with a T) in spendable wealth. Having assets and being willing to part with them aren’t necessarily the same things but many Boomers received a scare during COVID and now seem to be somewhat more willing to spend. One of the reasons they have money available is that many are now receiving Social Security income after having paid into the system during their working years. This year’s Cost of Living Allowance of 3.2% has just been announced so those receiving SS income will see an increase in January. This is significantly smaller than last year’s 9.1% but it’s likely to be enough to keep recipients’ spending on track, thus continuing to aid the economy.

Depending on your age and/or family situation, you are likely to feel inflation differently. While the Federal Reserve is doing its best to manage the process of cooling off the economy, their answer may not feel like the best one for you. While the Fed must work on behalf of the entire population, our practice is able to see each client situation as unique. If you feel the need for assistance in interpreting interest rates, inflation or any other aspect of your financial life, chances are we can help.