Power Up Wealth podcast – Inflation No Longer a Silent Killer – Episode 17 transcript:
James Derrick 0:00
Inflation has often been called the silent killer. But in 2022, that no longer seems to be the case. Today we’re going to talk about inflation with our guest and expert Mikal Aune.
Sharla Jessop 0:21
Welcome to the SFS Power Up Wealth podcast, where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
James Derrick 0:44
Mikal, thank you for joining us today.
Mikal Aune 0:46
Glad to be here, James.
James Derrick 0:47
I’m really excited about this topic. I think it’s probably the number one topic of 2022. You mentioned inflation as a silent killer. Could you explain what that means? And why you don’t think it’s the case anymore?
Mikal Aune 1:00
For years, as we’ve done retirement plans, we talk with our clients, prospective clients, people that are getting ready for retirement, people that are in retirement, and they’re all worried about the next big market downturn. They’re much more worried about that than inflation. And we have to build inflation into the plan and tell them look, we’re worried about inflation. Yes, we’re going to have downturns but the market comes back. Stocks grow back over time. And so we’re more worried that down the road, your home, your car, everything is going to cost more and everybody’s like, oh, sure, that’s not a big deal. Because over the course of one year, you don’t really see the impact of inflation most of the time, and that’s what it’s been for the last two decades. So we’ve been trying to convince people that inflation is a problem. Now for this year, we no longer have to convince people that inflation is a problem.
James Derrick 1:47
Yeah, I mean, it’s easy to see why. A lot has changed. Inflation is currently at 8.3%, which is very high. And I know some things are up even more than that. Could you talk a little bit about how inflation is calculated? And this idea of personal inflation?
Mikal Aune 2:07
Sure, the Bureau of Labor Statistics goes in and they figure out what is the cost of every single item that somebody might buy? And then how much did it increase over the last year. And sometimes they make substitutions, which can impact the inflation rate. So if they say, hey, people are no longer able to afford filet mignon than maybe they can afford New York strip. And so they make adjustments to it as they go along, which is up for some because in my mind, that is inflation. If inflation goes up and people can’t afford filet mignon, that’s inflation, you should still leave it in there, and you shouldn’t try to adjust it. So sometimes when they say, hey, inflation is at 8.3%, we’re like, okay, that’s their calculation, what’s real inflation like?
James Derrick 2:50
Well, I could see how that would be a slippery slope, too, because you can only substitute things out one time. I mean, pretty soon, you know, you’re doing chicken and then canned tuna. So so the substitution seems to only go one way. And then over a long period of time, there’s, yeah, a big change in the basket of goods that they’re measuring.
Mikal Aune 3:07
And I think that illustrates the point to how it impacts people differently and people that are poor have already made the substitutions where they’re already eating the canned chicken, or canned tuna, and they don’t have anywhere else to go in. So unless their income increases, they’re just eating less. I think that’s one of the reasons why inflation is such a big deal. And why the Fed wants to bring it down is because they realize that inflation impacts the poor the most. It still impacts all of us to a great extent, and everybody’s feeling it. Like, if you go to the grocery store, or drive a car, or even want to buy a new car, you’re really feeling the impact of inflation. You know, if you say the average is 8.3%, well, some people might be at 7, because they’re not doing as much, but other people might be closer to 12. Because the rate of increase on buying a car has gone up a lot. Gas prices have gone up a lot. Even red meat in the grocery store has gone up a lot. So there are things that are going to impact your personal inflation rate and make it higher. And so you might be feeling it more than just the 8.3% that they’re reporting.
James Derrick 4:08
Yeah. And this has always been the case. I mean, I remember years ago, we would talk about this in terms of retirees. How has the personal inflation rate for retirees in general changed?
Mikal Aune 4:20
For the most part, it’s they’ve usually been higher. The inflation rate for retirees has been higher because of cost of medications or cost of long-term care facilities, you know, things that impact them differently. I think that’s flip-flopped recently, because they may not be driving as much as somebody who’s driving into work every day. And so the cost of gas isn’t impacting them as much. Long-term care facilities are trying to entice people to come in because people have been worried because of COVID and they don’t want to go into long-term care facilities. So for retirees inflation may not be as bad as the general public right now. It still hurts though. Anytime there is inflation it hurts because they no longer have for increases in their income. Usually when you are working, you get raises. And so that kind of compensates for inflation over time, if you’re still working. Once you retire, you no longer get raises based on an employer, right? So we have to find other ways to give you raises in your accounts and growth. That’s one reason why somebody that retires at age 65, they can’t just go all conservative and take all their money and put it in CDs, because they’re not going to keep up with inflation. And that’s what we have to convince people or what we’ve had to in the past. Conversations are a little different these days, where we say, hey, you’ve, you’ve had this account conservative, this one, also conservative, let’s take one of those two accounts and move it to moderate to get you a little more growth to keep up with inflation for the long run.
James Derrick 5:47
I think there’s a lot to unpack from what you just said. So this kind of goes back to the beginning of what you were saying about adjustments people can make. Do you think people are making adjustments.
Mikal Aune 5:56
So I did an unofficial LinkedIn poll that everybody I’m connected with, to say, hey, what are you doing differently? Or are you doing anything differently, and 47% said, no, they are not changing their lifestyle, yet. 39% said that they are buying or driving less. 14% said they’re already dipping into savings. 0% said that they’re getting a credit card, which we thought was fascinating because in the first quarter of this year, there was a record number of credit cards that were open.
James Derrick 6:24
So over 500 million new credit cards in the United States. That’s about four new credit cards per household. And I know a lot of people are not opening new credit cards. And so that means some people are doing even more. They’re surviving on greater debt.
Mikal Aune 6:38
For now, right? Because you can only keep that ball going for so long before it implodes on you. And that’s why I think we’re seeing it, you know, 47% are saying that there’s no change to their lifestyle. The longer inflation goes, that’s going to change, and more and more people are going to be impacted, and they’re going to start driving less or changing their spending habits for eating out or groceries. So there’s, there’s a lot of impacts that we’re going to feel over time, and people will change their habits over time.
James Derrick 7:06
It’s interesting, because you mentioned that the people that are well off, they can make the most number of adjustments. They’ve got a lot of flexibility. And yet, those are probably the 47% that are not making a lot of changes. And, you know, eventually, I think many of them will. Either for reasons of inflation or other economic reasons, it, it seems like it just makes a lot of sense. I mean, one day, you’re going to be looking at your outflows and you’re going to realize, oh, my gosh, this silent killer has got me.
Mikal Aune 7:36
Yes! If you do feel affluent where you have enough where you don’t feel like you need to make any changes to your lifestyle, it’s still a wise thing to do to say, you know, maybe we should pull back a little bit, because there will probably be opportunities that are starting to form now, where you can buy into stocks, or you can buy into real estate or other things that will come as an opportunity in the future where it’s better if you have cash. And so now might be a good time to start stockpiling some cash for some opportunities that may come up in the future.
James Derrick 8:04
I love that idea of flipping it to an opportunity. Before we explore that more, let’s talk wages. How do wages play into all this?
Mikal Aune 8:12
So if your wages continue to increase, you can spend more. You can buy more. Because ultimately, if you have inflation, if people make the same, they just buy less. So for inflation to really continue to grow, people have to make more, otherwise you don’t have inflation. Now there’s some nuances where you have demand and supply, you know, gas prices, some there’s some constraints on that right now. There’s the supply chain is one of our new words that’s been around for a few years, that seems to be a hot topic, because that does have an impact to on whether or not you can get a product. So there’s a lot of things that are going to happen, and that we need to make changes to or and adjust to.
James Derrick 8:54
Yeah, well, it’s interesting, too, because wages are part of the solution. But they’re also part of the problem as this thing kind of just spirals and continues and feeds on itself. Let’s jump into the planning. You mentioned adjustments to people’s investment accounts, you talked about opportunities, how does the inflation affect the planning that you’re doing and the investments that you’re making?
Mikal Aune 9:17
Starting at the low end, like your savings accounts, CDs, money markets, things like that? People are like, well, gosh, if the Federal Reserve raises rates, you know, they, they’ve done it twice this year. So 0.75% increase combined. But they’re planning to do it another six times this year. So people are like, well, is my money market gonna pay a lot more by the end of the year than it is now? And it’s like, it’s gonna pay more, but not a lot more. The actual savings accounts don’t increase that much. You know, right now they’re paying 0.1, 0.2, maybe 0.3%. And maybe by the end of the year, there’ll be you know, 0.5, 0.6, 0.7. We don’t know. We don’t know exactly where they end up, but they won’t increase as much. So we’ve had a lot of people that even though the market is down right now that they’re looking at as a buying opportunity saying, okay, I’ve have money that’s been sitting in the bank, I’m going to take some of this and I’m going to invest it. I don’t need the money for at least five years. I’m willing to take moderate risk on it and see if this money will grow for me over the next five years.
James Derrick 10:16
Do you see inflation as a major problem when you start looking out beyond that?
Mikal Aune 10:21
Yeah, especially when you look out 30 years. And I think this is why, for us, we consider it a silent killer is when somebody starts retirement and they need $6,000 a month to live on. Well, in 25 years, that’s going to be more like $14,000 a month to live on. And when people try to comprehend those numbers, they’re like, that’s, that’s amazing. But when you go back, and you look at inflation over time, it’s like that’s been the story. You go and ask your grandparents, what they bought their house for, and they bought it for $6,000 or $12,000. It’s it, you can’t even get a car for that these days. That’s inflation. And it just happens so slowly over time, for the most part, that you don’t think about it, and you don’t realize how much of a killer it is to your retirement nest egg. And that’s why you have to have some money that is invested for the long run. So when we help people design a retirement plan, we aren’t just taking something and saying, okay, you’re now retired, we’re going to have a conservative. We like to split money up into different buckets based on timeframes as to when they’re going to use the money. What you’re going to use in the next one to five years should be conservative, five to 10 years can be moderate, 10 plus years needs to be aggressive. And aggressive because you need something that’s going to keep up with inflation, because otherwise, you’re going to be in your 80s. And you won’t have enough income to pay your the $14,000 a month that you need to live on on a monthly basis.
James Derrick 11:45
Yeah, I think that’s fascinating. Beating inflation truly is like the number one goal. Coming in to see you as an advisor, I mean, people should be able to make some plans so that they can adjust and invest and see the opportunities that might be developing as a result.
Mikal Aune 12:01
You know, I think it’s interesting to see the impact too on mortgages and housing prices, and what’s going to happen there. And we’ve seen housing prices go up a lot. And a lot of that is because of inflation and demand that we just haven’t been building enough homes for the last decade. And so there is more demand for homes, and that goes into increased prices. But as you see interest rates go up, mortgages go up. So a year and a half ago, you might have been able to get a mortgage for 3%. Right. And so I did the math, and I’m like if somebody is paying a normal mortgage, that’s $2,000 a month now, you got to tack on taxes and insurance, that’s another 200 bucks. So they’re like $2,200 a month. A year and a half ago, they could afford a $475,000 home. Today, I checked the rates in there around 5.375%, which doesn’t sound like a whole lot, you know, going from 3% to 5.375%. But that’s a 56% increase in the rate. Okay, and the impact on a home that you can afford, it drops it from $475,000, down to $358,000 that you can afford. And so that’s a drop of $116,000 or drop of 24% in what in what you can afford. If people are making more they can afford a higher mortgage payment. But if they’re making about the same, then housing prices have to come down. Now, I don’t know what you think if housing prices are going to come down 24%, because that’s a big drop.
James Derrick 13:28
I just want to repeat that. I mean, that’s amazing. So So a $475,000, home would now be worth 24% less, because that’s the affordability level based on the interest rates. That’s fascinating. And it gets you a little bit worried if interest rates continue to go up as the Federal Reserve tries to kill inflation. Wow! What an impact that will have. To answer your question. I don’t know how much impact that’s going to have. But it’s going to have an impact and those housing prices are not going to rise if interest rates keep going up. There’s just no way it’ll happen. And that’s fascinating, because back in 2008, 2006, 7 and 8, housing prices dropped by about 30%. And that caused what we call now the Great Recession. And so that’s kind of a daunting thought that that interest rates are making affordability less. I will say that what you mentioned about a limited supply of homes out there, though, that that is going to
Mikal Aune 14:29
have an impact
James Derrick 14:29
have an impact. That’s going to buoy up these prices. And and so maybe that we don’t see the full brunt of impact from interest rates.
Mikal Aune 14:38
Exactly.
James Derrick 14:39
You know that the math might suggest.
Mikal Aune 14:41
Do not see a 2008 because that was caused by some major overlending and collateralized debt obligations in a financial collapse not just in the United States but globally. So I don’t see this as a 2008. I don’t think thing you know, home prices are gonna drop 24% just because what you said there’s, there’s too much demand. We haven’t been building enough. And because of that housing prices are probably not going to drop 24%. But they’re not going to keep going up with the rate that they do. Nothing keeps going up that fast.
James Derrick 15:12
Yeah. Well, I completely agree with that. And I think that’s another good reason to be watching for opportunities. And don’t be afraid to make some adjustments.
Mikal Aune 15:22
Yeah. So you talk about the people that haven’t gotten into homes yet. What about them? Should they be getting into a home right now and trying to take advantage of the the interest rates, because they’re kind of combating to things where home prices are so high, even if they’re getting a decent interest rate, they are locked into a higher mortgage. So should they wait six months to a year to buy or not? And I think it’s a real you’re between a rock and a hard place. Because housing prices are still high, and interest rates are starting to go higher. In the long run interest rate at 5.375% is still killer compared to the historical average. So that’s still a great interest rate. It’s just housing prices are kind of high. And they may come down some, but if you wait too long interest rates might be a lot higher and what you can afford will be even less.
James Derrick 16:11
Yeah, my mind is going like 100 miles an hour here thinking about what does it all mean? The that’s the number one question people ask me is like, well, I’m thinking about buying a house, or I’m thinking about moving to a different home. What do you think is now a good time and when it comes to the investment world, we always say now is always the best time. When it comes to homes. I usually tell people well think of it as a place to live and not as an investment. And that way that you will buy the home that you can afford. I would probably say this is also about it. Like you can always refinance if interest rates come down. Now that’s an if, because we don’t know. As you mentioned, 5.75%, if if you can get that, rate, I mean, historically, that’s a very good rate. So that’s not really a major problem. But I would be a little worried about paying top dollar for a home. I think the time has come to try to get a bit of a deal.
Mikal Aune 17:04
Yeah, it is a little different if you already own a home, because if you own a home, you can sell your existing home for top dollar, you buy another one, and you’re kind of just replacing like for like, but for the people that don’t have a home, that’s the people that I feel like are between a rock and hard place right now.
James Derrick 17:18
I think we’re coming into a time period where maybe people will be able to find deals, whereas in the last two years, it’s been hard to.
Mikal Aune 17:26
It’s been a seller’s market, and it’ll change to where it becomes more of a buyers market. Definitely.
James Derrick 17:30
Now I’m also intrigued by this idea that every generation has to learn their lessons.
Mikal Aune 17:34
Yeah.
James Derrick 17:35
You know, so. So some people don’t remember 2007. Some people don’t remember the 2000s. I don’t remember the 1980s very well. And the 1970s. We were alive. You and I were alive for the 1970s. But don’t remember it very well. So we have lessons to learn.
Mikal Aune 17:50
Yes.
James Derrick 17:51
And and hopefully we don’t learn them the hard way.
Mikal Aune 17:53
And I think you’re right. Like as I’ve studied more of the stock market in history. Like there are major downturns in the stock market about every 30 years. And we’re talking, you know, like the the 40 and 50% type. What we’re facing now probably won’t hit that level, but you’re talking 2008 or 2000 to 2003. You know, and it had been 30 years since it had had a major meltdown. And a lot of times it is that each generation has to learn and a lot of times you have to learn through the school of hard knocks. As part of an answer to your question too, what else has changed? Or what else are we worried about? Well, bonds. You know a lot of people are worried about stocks and what’s happening there. But bonds have had a really bad year, at least as far as I’ve seen as the worst since 1942. So inflation is the cause of that. And I tried to explain bonds, you know, because people are like, well, why are bonds going down? You know, because a bond is kind of like a CD where it’s paying a stated interest rate. And if my bond is paying 2% and inflation is at 2%. I’m staying up. I’m keeping up with inflation. But if my bond is still paying 2%, and inflation spikes to 8.3%, like it is I’m losing, right? I mean, it’s even worse if I’m in a savings account earning 0.2%. Right, I’m just not keeping up with inflation. And so that’s why you have seen bonds really take it on the chin, and at one point, they’re down over 10% for the year, which is horrible for a bond. Usually, if they have a bad year, they’re down 5 or 6%. So they probably will come back if inflation mellows later on this year. And that’s what most projections are that inflation will come down and subside a bit by the end of this year. And you will see bonds come back and you will probably see stocks come back to.
James Derrick 19:29
Yeah. Well, we’ll end on that note, Mikal. Thank you so much. I can say for sure that the Federal Reserve is determined to bring that inflation number down. And I think the sooner it comes down, the better it’s going to be for everybody. Thank you for joining us, Mikal.
Mikal Aune 19:43
Thank you glad to be here.
Shane Thomas 19:49
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn.
The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Securities America. Inc., Member FlNRA/SIPC. Roger M. Smedley, Sharla J. Jessop, James R. Derrick, Shane P. Thomas, Mikal B. Aune, Jordan R. Hadfield, Lorayne B. Taylor, Registered Representatives. Investment Advisor Representatives of Smedley Financial Services, Inc.®. Advisory services offered through Smedley Financial Services, Inc.® Smedley Financial Services, Inc.®, and Securities America, Inc. are separate entities.
