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Inflation - Where Are We Headed?

Inflation - Where Are We Headed?

November 01, 2021

Inflation continues to be one of the most discussed topics in financial circles. The bottom line: it’s here and will continue for several years. In my last blog I discussed the M2 money supply and its effects on investable asset values. M2 money supply typically increases by about 6% per year. Since February 2020, the M2 money supply has increased by 33%. That means that an extra 24% (calculated using the 33% increase less the typical 9% increase over an 18-month period) of money is in the system today and will find its way into prices.

Money supply increases will likely continue, albeit at a more normalized pace in the coming years. The 24% extra money in the system will create additional inflation over and above what we typically experience. If it takes 6 years for the money to be fully absorbed by prices of everyday goods, that will result in an additional 4% inflation over our typical 1-2%. According to the US Bureau of Labor Statistics, the 12-month Consumer Price Index (“CPI”) figure increased by 5.3%. If you are interested in the full 37-page report from the BLS, you can find it here (

The largest component of CPI is shelter (rent), which accounts for 32% of the CPI. The COVID-related eviction moratoriums are ending. Those tenants will be dislodged, and new tenants will be put in place. Rental prices are projected to increase by 15% annually, and in certain markets, such as Austin, TX rental rates are increasing by two to three times the national average. This means that we can expect to see continued inflationary data from that component alone.

CPI is up, inflation is here to stay, but how does it impact us? The obvious impact is that prices are rising for our daily living. Energy costs are up 25%-40% annually, used vehicles are up 32% from a year ago (versus +7.6% for a new vehicle). However, it’s not all bad news, we have already started to see data to suggest that wages are increasing.  On Wednesday, the Social Security Administration stated that 2022 benefits will increase by 5.9%, the largest increase since 1982. Finally, asset values for investments and real estate have increased substantially in the past 18 months.

3 Actions to make the most of this situation

  1. If more income is required to live, contact your financial advisor, perform a portfolio review, and redesign your income distribution plan.

  2. If you own rental properties, update your lease agreements to include CPI adjustments and re-establish current rents to the market rates. Many landlords have allowed rental rates to remain stagnant for many years. The time to do this is now, and don’t let inflation minimize the return of your investment property.

  3. Address your salary at your annual review. Inflation means that your wages should be going up. CPI increases were 5.3% and Social Security benefits are increasing by 5.9%, that should be a good starting point in your negotiation. Add to that any merit-based increases that are appropriate.

The money supply increases associated with the COVID pandemic were unprecedented. I don’t expect that level of increases in the foreseeable future. Everyone can be taking proactive steps today to minimize the negative impacts that inflation can bring for the years ahead. If you need help, I know a guy {wink}.