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The Fed Got It Wrong (And Now YOU Have to Pay)

Posted July 13, 2021

Zach Scheidt

By Zach Scheidt

The Fed Got It Wrong (And Now YOU Have to Pay)

Today's news isn’t good for retirees... or really for any financially responsible American.

This morning at 8:30 EST, the Labor Department released its inflation report. And the numbers were absolutely horrific.

If you're a regular reader of Rich Retirement Letter, you probably weren't surprised by the data. After all, we've been planning for inflation for several months now.

But higher inflation caught the rest of the market off-guard.

As we predicted, investors are now scrambling to adjust their positions to account for rapidly rising prices.

And individuals across the country are finding fewer dollars left over after paying for their day-to-day expenses.

Today, I want to show you exactly what’s happening with inflation and make sure you're in a position to protect and grow your investments throughout this turbulent period.

A "Surprise" Reading on Inflation

This morning's inflation report showed that prices are rising at the fastest pace in almost 13 years.

For the past month, the Consumer Price Index (CPI) rose by 5.4% over last year's level.

Even when you take out the more volatile food and energy components, prices rose by 4.5% over last year.

Both of these readings were well above what economists expected. And both are more than double the Fed's loose target of 2% inflation.

And while higher inflation is something that I've been warning you about here at Rich Retirement Letter, I can tell you I have no joy in saying that I was right.

After all, higher inflation is a major challenge for so many Americans. And it hits retirees and savers especially hard.

That's because when you're financially responsible and save money, inflation naturally erodes the value of your savings so it can't be used to cover as many expenses.

Economists may claim to be surprised by this high reading.

But the entire economy has been perfectly positioned for high inflation. All we needed was a spark of economic recovery to set off a wildfire of higher prices.

And now that those prices are moving higher, it's going to be very difficult to get inflation back to normal.

Let's take a look at how inflation can quickly gather momentum — especially with today's perfect conditions for higher prices.

Inflation Isn't "Transitory" — It's Here to Stay

I've started to cringe every single time I hear a Fed member or some TV media personality use the word "transitory."

For some reason, this is the go-to word to reassure the public that "everything is ok here" and that we don't need to worry.

Transitory implies that the inflation problem is temporary... that it's just part of our economy transitioning from crisis mode into a more healthy recovery.

And while I believe our economy is in a strong recovery stage, there's no way in hell inflation will just be temporary. (Excuse my language, but I get fired up when I feel like you're being lied to.)

To understand why inflation is here to stay, let's look at some of the individual pieces of today's inflation.

First, let's talk about labor. Thanks to extended and generous unemployment benefits, companies have had to pay out the nose to hire new employees.

(You can argue whether these programs were good or bad, necessary or unnecessary. But it really doesn't matter. What we're talking about today is the effects of these programs.)

Now that companies have raised wages, there's no way labor costs will go back down. People aren't just going to accept a pay cut once more workers come back into the market.

And with so many people moving jobs to take advantage of better offers across the street, companies are going to have to pay more just to keep existing workers happy.

When companies pay more for workers, prices must rise to allow companies to continue to make a profit.

And since labor costs are "sticky" (people don't easily accept a pay cut), this inflation is here to stay.

Moving on to some other factors on inflation, we've seen a huge spike in the price of gasoline.

My 8-year-old son couldn't believe we spent $80 last week just to fill up our gas tank. I had to laugh when he started calculating how many lacrosse balls he could buy with that money!

But gas prices don't just hit your wallet when you fill up your car.

They also get factored into transportation costs for just about everything you buy. After all, merchandise has to be shipped to stores (or to your home) and these shipping costs continue to rise.

Severe underinvestment in new oil wells will naturally keep prices higher.

And we don't have enough renewable electricity capacity coming online, so natural gas will also be in high demand for generating electricity

I could go down the list (lumber prices, data services, streaming media, real estate, and on and on.)

But you get the point. Inflation is picking up — and it feeds on itself.

As Expectations Change, the Situation Gets Worse

One of the most damaging things about inflation is the way human nature can exacerbate an already difficult situation.

When people (or businesses) expect prices to move higher, there’s a natural tendency to buy more of what you need now rather than wait until you need it later.

That way, you get materials, medicine, food, equipment and even hotel rooms and flights at today's prices.

This can be much better than waiting to buy something when you really need it — and paying a higher price because of inflation.

I saw this trend in action firsthand when I was a teenager.

My dad took me on a humanitarian trip to Croatia during the Bosnian war. I'll never forget him explaining why people were lined up at the store on Friday afternoon.

"These people have to spend their money right away... Because if they wait until next week, they won't get nearly as much bread, milk or fuel."

Now I'm not saying we're going to see food or fuel shortages here in America. Our situation isn't nearly that dramatic.

But I do believe that as consumers and businesses become more concerned about inflation, spending will pick up as buyers try to get ahead of higher prices.

And Economics 101 tells us that when demand picks up, prices must rise.

So concerns about inflation (especially after a hot CPI report like we received today), can naturally drive more inflation.

That's why the Fed is so intent upon telling us that inflation is transitory.

For us, the key takeaway is to continue investing in stocks that can protect your wealth from inflation.

If you're already on this road, then congratulations. Your wise actions are already starting to pay off as the market reacts to this new information.

And if you haven't put an inflation plan to work yet, there's still time!

I'd suggest looking through some of our recent articles here at Rich Retirement Letter and buying some of the stocks we've covered recently.

Then, please stay tuned for more updates along the way. We've got a lot to cover as we walk through this new inflationary season.

Here's to living a Rich Retirement!

Zach Scheidt
Editor, Rich Retirement Letter
RichRetirementFeedback@StPaulResearch.com

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