﻿Inflation is still at an all time high. As of April 2022, the annual inflation rate for
the United States is 8.3%. A 40 year high. And consumers and businesses are feeling it
across all sectors. Gasoline prices are at some places, $6 a gallon. Food is 10% more expensive
than a year ago. And plane ticket prices are at ridiculous levels. So what is going on?
Why is inflation continuously rising and what can we do? Hi, if you are new to the channel,
my name is Tae from Financial Tortoise. Where we learn to grow our wealth, slow and steady.
In today’s video we are going to tackle inflation. And this video is broken into three parts. So feel
free to skip around to sections you would find most useful. First, for those of you who might
be new to the concept of inflation, I’ll share some fundamentals around what inflation is and
why we are even talking about it today. Second, we’ll take a stab at trying to understand what’s
driving the current inflation craze. And third, most importantly, I want to share with you 5
specific recommendations as regards to how you can respond to these high inflation times. Alright,
but first. For those of you who might not be too familiar with this concept, what is inflation? In
a nutshell, inflation is the rate that the costs of products and services increase over time.
Essentially lowering the value of the money that you have today. I remember watching Jurassic Park,
the original one in theaters in 1993. I was in elementary school and it was one of the coolest
experiences in my life. My friend’s dad was kind enough to pay for our tickets and I distinctly
remember it costing $3 per kid. And for a 3rd grader with no money, $3 was a lot of money.
Fast forward to today, the latest Jurassic Park movie, Jurassic World Dominion is planned to be
released in theaters this summer. And if we were to watch this in the theaters, it would cost us
more than $10 per person. I may not be as generous as my friend’s dad when paying for my kid and his
friend. In a period of 30 years, movie ticket prices have tripled in cost. And this is what is
called inflation. In the United States, the most famous and widely used indicator of inflation is
the Consumer Price Index also known as CPI. This measures the change in prices paid by consumers
for goods and services. It does this by measuring the price of an item in one period compared to its
prices in a previous period. For example, what was the price of a eggs right now compared to the same
time period last year. Or the year before. But the bottom line is that inflation erodes purchasing
power over time. With inflation, your dollar tomorrow will not go as far as it does today.
But inflation isn’t necessarily a bad thing. And inflation isn’t anything new. We have seen it
every single year consistently since the beginning of time. This is why the movie ticket that cost
$3 in 1993 now costs over $10 today. And why a cup of coffee that used to cost a quarter 50 years
ago and now costs on average $2.00 today. And for the past several decades, inflation has been quite
steady. Around 2-4%. And when it remains this moderate, it's actually a good thing for the
economy. Moderate inflation is actually a sign of a healthy economy. When the economy grows, demand
for items increases. And this increase in demand pushes prices a little higher as suppliers create
more items that consumers and businesses want to purchase. Workers benefit, because from the
increase in demand for labor, their wage likely increases. And with higher wages, these workers
can go out and purchase more items. Thus creating a ‘virtuous cycle’ of healthy supply and demand.
Inflation isn’t causing this, rather a moderate inflation is a reflection of this healthy,
growing economy. However, when it starts to push beyond the normal average of 2-4% and runs at 5%
or higher, it can be bad for the economy. Just to give you context, the last time we had inflation
this high was 40 years ago when Ronlad Reagan was the President. When it’s this high, essential
goods become unaffordable for the average consumer who’s paychecks aren’t rising as quickly
as inflation. Basic needs like food and gasoline become harder and harder to afford. Economy slows
down. Less items being sold. Less items being created by suppliers and less demand for labor.
Companies also not only need to deal with lesser demand but also higher cost of production on
their end. Costs of key parts like machinery or microchips are now more expensive than before.
Layer this on top of less demand from consumers, they might need to cut back their production or
worse yet, declare bankruptcy. So, what is causing the current high inflation? To a record level of
8.3%? There are two primary factors I like to highlight here. One is just basic demand and
supply. As countries emerged from the covid lockdown, shops opened and people jumped at
the opportunity to go out and buy stuff with money saved. In essence driving an extraordinary demand
for goods. However, it took a while for suppliers to be able to meet this increased demand.
When demand is greater than supply, you either get shortages or price increases. In this case, we got
a little bit of both and thus pushed a lot of the prices up driving higher and higher inflation.
The second contributing factor is the War in Ukraine. Not only is the war in Ukraine having
tragic humanitarian consequences, there is also an economic consequence. Specifically on commodities.
The war in Ukraine has dealt a major shock to commodity markets, altering global patterns of
trade, production, and consumption. According to the World Bank, the increase in energy prices over
the past two years has been the largest since the 1973 oil crisis. Price increases for food
commodities, of which Russia and Ukraine are large producers. And fertilizers, which rely on natural
gas as a production input, have been the largest since 2008. And the result of all these increases
in commodity prices has fed through the system causing higher inflation. So the big question is,
what should we do? How can we most effectively manage high inflation? The Federal Reserve is
increasing their interest rate in order to combat the rising inflation. And the hope is that they
can successfully do this without putting the whole economy in a recession. However, we don’t
want to just depend on Jerome Powell to get us through these hard times. There are tons of things
we can do and I want to share with you my 5 recommendations. First is to continuously invest
in stocks. Stocks are naturally a good inflation hedge. When we own stocks, we are essentially
owning a piece of a business. Well known and profitable businesses like Apple, Disney and Nike.
And all these businesses have valuable assets and create amazing products. And the value of these
assets and products naturally rise with inflation because these companies need to remain profitable.
Thus, when we are invested in stocks, inflation hedge is inherently built-in. And in my opinion,
the best way to be invested in stocks is through low cost, well diversified index funds like
Vanguard’s Total Stock Market Index Funds. VTSAX. Not individual stocks or actively managed funds.
Through this one index fund, you are essentially owning a piece of every publicly traded company
in the United States like the one I mentioned earlier - Apply, Disney, Nike and thousands more.
So if we want our money to stay ahead of rising inflation, continue to invest in stocks. And
more specifically, well diversified index funds like Vanguard’s Total Stock Market Index Fund. My
second recommendation is to maintain a good cash reserve. I know this may sound counterintuitive
against rising inflation. However, hear me out. Yes. Cash is one of the hardest hit categories
during high inflation. A dollar today is worth less tomorrow. Thus the rationale for most
people is to find inflation beating assets and move all your money into those assets. However,
these are uncertain times and we don’t know what tomorrow will hold. Yes, is the Federal
Reserve trying to lower inflation without kicking off a full out recession? Of course. However,
historically, recession has most often followed increased interest rates and we can’t just pin
all our hopes on hope. Crossing our fingers that the market and the economy will stay in tack,
while inflation decreases. And the best tool against uncertainty is always cold hard cash.
Cash acts as your shield against uncertainty. Cash provides you with a soft cushion in case
you fall. And Cash keeps you in the game without completely knocking you out. It may be painful
to watch your cash lose value as it just sits in a bank account. However, don’t just look at money as
something that must always be growing. It is still working for us even when it remains liquid cash
sitting in our bank account. Working to give us peace of mind and working to give us that cushion
if something were to come up. Ideally I like to keep at least 6 months of expense in cash in the
bank account at all times. Sometimes when things seem really uncertain, even 12 months. Hold a good
pile of cash and have a piece of mind The third recommendation is to lock in your interest rate
for your home mortgage. I know mortgage rates have increased in comparison to the last few years,
but when we compare historical rates, it is still a good rate. 15 years ago, the average 30 year
mortgage interest rates were 6%. And that was considered the lowest in history. You wind the
clock back a bit more. 30 years ago the mortgage interest rates averaged 9 to 10%. We tend to only
remember recent events but it's good to step back once in a while and get a broader perspective to
appreciate our current situation. And housing is most often the biggest expense in many family’s
budgets. So in times of high inflation, if you can lock in your mortgage payment with a good fixed
rate, it acts as a natural discount against rising inflation. One alarming trend I want to call out
is that currently with increasing home value, many people are cashing out their equities. And
some with hopes they can make more money in other assets. Home equity loans aren’t necessarily a bad
thing. But I would recommend thinking really hard before taking them. Especially during these times
when the real estate market has increased in value as quickly as it did. We just don’t know
what the future holds as regards to the economy and its ripple effects on the real estate market.
So take caution and thread carefully. Number four recommendation in these times of high inflation is
to reassess your budget. Especially in categories most impacted by inflation. The overall inflation
is listed at 8.3% right now, but there is a lot of variability across different sectors.
The sectors most hardest hit are Gasoline at 48%. Used Vehicle at 35%. Hotel Room at 29%.
And Airfare at 24%. Even Ice T tweeted the other day about his traumatizing experience at the gas
station. “I was robbed at a gas station in NJ last night. After my hands stopped trembling..I managed
to call the cops and they were quick to respond and calmed me down..... My money is gone.. the
police asked me if I knew who did it..I said yes.. it was pump number 9.” It might be worthwhile to
look at alternate means of transportation if the rising gas prices are really hitting your
budget hard. Maybe public transportation. Or even carpooling. My wife and I did this for many years,
and not only was it good for our wallet, but for our marriage as well. When our kids were super
young, it felt like the only time we had to talk was during our drives. And with high hotel room
and airfare costs, it might be worthwhile to look at alternate ways to vacation this summer. Maybe
trying out that camping site you’ve been thinking about. Or visiting the local beach instead of
flying somewhere. We can’t do much about many of these rising prices, but we have control over how
we can respond. We have a lot more control than we give ourselves credit for, so reassess your budget
to see where inflation can have a lesser impact on your overall spending. Number 5 recommendation
is to invest in yourself. You are probably like, what does that have to do with inflation? Well,
this again comes with the theme of uncertainty that comes with high inflation. Despite the
shaky market and high inflation, unemployment is the lowest it's ever been. As of April, 3.6%.
Companies are struggling to not only fill vacant positions, but retain their workers. It’s an
employee market and you can have your pick of the lot in the job that you want. So this is a great
time to make that shift into the job or career that you always wanted. Again, we don’t know
what the future holds. Things can quickly turn and company’s may start to tighten their belts again.
Invest in yourself and double down in your career path so you have a more secure employment in the
future. Or start to reinvent yourself now so you are ready for a new career path. And this advice
is always true regardless of high inflation or an uncertain economy. Phil Knight, the founder of
Nike actually founded his shoe company on nights and weekends, selling Japanese imported running
shoes from the back of his car while working full time as a public accountant. We should
always be investing in ourselves because life is too short and we never know what the future
holds. And if you’ve been thinking about a career shift, check out my video here where I go over
the best careers for the future. Thank you guys for watching and until next time, all the best.