There is no vaccine against inflation

One of the sad ironies of the waning COVID-19 pandemic is that just as Americans feel ready to dine in restaurants, board a plane, or shop in a real store, it all seems much more expensive than it was a year ago.

It is not an illusion. Consumer prices rose 0.9% in October, up 6.2% from the previous year, the largest increase in 31 years. Prices have increased across the board, affecting everything from eggs to TVs (see the table below for some of the hardest hit categories).

Kiplinger forecasts an inflation rate of 2.8% by the end of 2022, down from 2021 but above the average annual rate of 2% over the past decade. Contributing factors:

The growth of wages. In what has been dubbed the Great Resignation, millions of workers quit their jobs, causing employers to pay more to retain and attract employees.

In the third quarter of 2021, wages rose 1.5%, adding to a 0.9% increase in the previous quarter and marking the biggest jump in two decades. For the 12 months ending in September, wages and salaries increased 4.2%. It is not known, however, if we are in what is called a wage-price spiral, which occurs when the demand for higher wages drives higher costs and fuels increased demand for higher wages.

Product shortages. The pandemic and the resulting economic bottlenecks created delays in distribution channels around the world. Ports are struggling with bottlenecks, warehouses are understaffed, and there are not enough truck drivers to move goods. This means that available goods are more expensive, especially at a time when increased consumer spending has driven up demand.

The personal savings rate, which measures how much money Americans left behind each month after spending and taxes, was 7.5% in September, down from 14.3% a year earlier.

Energy price. Gas prices rose 3.8% between September and October and are up almost 50% from the previous year. Prices at the pump were pushed up by the strong global recovery in oil demand, coupled with a slow rebound in oil production (see Energy actions are back in force). Kiplinger expects gasoline prices to drop slightly by the end of the year, but that will still leave motorists paying more than $ 3 a gallon on average – and in parts of the country, prices of gasoline will continue to cost $ 4 per gallon (or more).

Interest rate outlook. If inflation persists above 2%, which looks likely, the Federal Reserve has signaled it will raise short-term interest rates in an attempt to slow the economy. Kiplinger predicts that the Fed will start raising rates in fall 2022, which is sooner than the central bank expected. But that may not offer much relief for people who have money in low-interest savings accounts, says Ken Tumin, founder of DepositAccounts.com.

Banks continue to hold a record amount of deposits, while demand for loans remains weak. This means that banks don’t feel the need to raise interest rates to attract more deposits from customers, Tumin says. Currently, online savings accounts pay around 0.5%, with large physical banks paying even less than that.

There’s encouraging news for individuals looking for a low-risk place to hide money they can’t afford to lose: The Treasury announced in November that Series Savings Bonds Newly issued I would pay a composite rate of 7.12%. The composite rate consists of a fixed rate, which is currently 0% on new bonds, and an inflation rate, which is linked to the government’s consumer price index and all adjusts six months from the date of issue of the bond.

Bonds have drawbacks. You are limited to investing $ 10,000 per year in electronic bonds I, plus up to $ 5,000 in paper bonds which you can only purchase with your federal tax refund. Also, you cannot redeem an I Bond in the first year. And if you cash it in before five years have passed, the penalty is three months of interest, although that’s considerably less severe than the early withdrawal penalties on most five-year CDs.

Because of these withdrawal limitations, I Bonds are not a good place to invest the money you might need right away, Tumin says. However, they could be a valuable addition to your emergency savings. For more information on I Bonds, visit www.treasurydirect.gov.


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