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November economic outlook: Is inflation here to stay?

Quick takeaways

  • 2021 (and 2022) are not the 1970s. Federal policymakers are closely watching what happens with inflation, job growth, and consumer spending to know if they have to put tools such as increased interest rates to control price increases.
  • The weird data reinforce the importance of fundamentals. A budget built for your wants and needs, an emergency fund to help when you need it, and steady retirement savings all matter.

Things that are true at the same time:

  • There are 9 million unemployed people in the United States.1
  • There are 9 million unfilled jobs in the United States.2
  • For every 100 leisure hospitality workers, there are 10 open jobs.
  • For every 100 leisure/hospitality workers, there are seven who quit each month.

Those statistics are proof that our current economy is confusing, frustrating, and a see-saw. Wildly positive pieces of data, including wage growth, compete with bleak headlines such as “A Stock Market Malaise with the Shadow of ‘70s-Style Stagflation.”3

Even the experts are hesitant and a little bit flummoxed. “We’d all love a crystal ball that tells us what will happen next and when,” says Heather Winston, assistant director of financial advice and planning at Principal®. “Sadly, the clarity any investor would hope for just doesn’t exist today.”

What can you pay attention to for the economic outlook? What’s likely to challenge you (hello, supply chains!), and how may you better protect your wallet?

Here are some insights.

Wages are rising.

You’ve probably gone into a restaurant or a pharmacy or a grocery store where the lines are long and the employees overworked. In fact, the whole world feels a little short on staff … because it is. Many people—more than 4 million in September alone—have left the workforce.4 But that doesn’t mean consumer demand has slowed. In some instances, it’s quite the contrary.

That equals competition to maintain and recruit employees, which has forced businesses of all types to boost wages. Chipotle bumped hourly pay to $15 an hour.5 New Amazon warehouse employees can expect to make about $18 an hour, plus a signing bonus.6

Rising wages aren’t always a bad thing. “To put it simply, rising wages means more money is circulating, so consumers then spend more—and some save more—which means positive economic growth,” Winston says.

And the rise is a market correction to the depressed wages of the last few decades.

“The typical American worker’s wages have a lot of ground to make up,” Winston says. “It’s going to take time to see those negative impacts work through the system.”

Your wallet: If you get an increase in pay, consider using it to shock-proof your budget from ups and downs in the coming year. Can you set up or add more to a robust emergency fund, for example? Read “Why you need an emergency fund (and how much you need).”

Some prices are rising.

A couple of things are at play in those inflation news headlines. As we’ve talked about in past months, the supply chain is sticky. Shortages abound for lots of different goods, and that’s putting a crunch on what manufacturers can provide to retailers. Lack of or more expensive raw materials often lead to price increases. Some of the basics we all rely on, such as natural gas for heating our homes, are experiencing big price jumps.

The wage growth plays a part in inflation, too. If businesses are paying employees more, that increase comes from somewhere, either a decrease in profits or a pass-along cost bump for consumers.

“I like to think of it as the tug of war that’s always present in the economy: We all want to earn more money, but then the cost of what we buy will also go up,” Winston says. So strained supplies plus increased wages equal a perfect recipe for inflation. The question is: How much inflation and for how long?

What experts are worried about is a repeat of the 1970s stagflation cycle where wages topped out but high prices were stuck, too.

“It’s the pace and frequency of the change in wages and prices that every investor has to consider,” Winston says. “It’s why we can’t talk about saving and spending independently. What will you do if the prices of things you want and need are outlandishly high? Typically, you will no longer spend and the economy gears may slowly grind to a halt.”

However, caveats exist, especially with those headline-grabbing September numbers. If you strip out some categories, core inflation (energy plus food) is right about what experts thought it would be.7 And inflation is likely to be bumpier than any of us would like.

Something—wage growth, supply chain issues—has to give.

What will you do if the prices of things you want and need are outlandishly high? Typically, you will no longer spend and the economy gears may slowly grind to a halt.”

Heather Winston, assistant director of financial advice and planning

Your wallet: One tool that the U. S. Federal Reserve uses to cool an overheated economy is an interest-rate increase. Experts expect one to happen, but no one can tell quite when. To protect your budget from that change, think about paying off any debt with a variable interest rate, such as credit card balances. Read “3 ways to pay off your debt.”

The federal government still has some levers to pull.

If you’re one of the 70 million people who rely on Social Security for some or all of your income, you’re about to get a raise.

In mid-October, the Social Security Administration announced the biggest cost of living adjustment—5.9%—in four decades. That bump should help people who are trying to adjust living on their fixed incomes with the rising prices of necessities.

Proposed federal legislation, including infrastructure funding, may accelerate growth in some areas of the economy. And the state of the pandemic in this country and across the globe will continue to impact how you (and everyone else) spend and save over the remainder of this year and into next.

“It can often feel like we’re disconnected from the economy, but collectively we as individuals do control a lot,” Winston says. “What we’re willing to spend on everything from housing to food to toilet paper is always within our immediate control.”

Your wallet: Do you have any big or regular expenses—such as braces for a teen or prescriptions—on the horizon for 2022? If so and if you have the option to choose or adjust your benefits , take advantage of saving a little at a time in a health savings account or flexible spending account. Read “What to look for when choosing benefits for open enrollment.”

It can often feel like we’re disconnected from the economy, but collectively we as individuals do control a lot. What we’re willing to spend on everything from housing to food to toilet paper is always within our immediate control.”

Heather Winston

What's next?

1 https://www.wsj.com/articles/job-openings-are-at-record-highs-why-arent-unemployed-americans-filling-them-11625823021

2 https://www.bls.gov/news.release/jolts.t04.htm

3 https://www.nytimes.com/2021/10/13/business/stocks-inflation-stagflation.html

4 https://www.morningbrew.com/daily/stories/2021/10/12/americans-quit-their-jobs-at-a-record-rate-in-august

5 https://www.npr.org/2021/08/10/1026580930/average-wages-are-going-up-and-so-are-prices

6 https://qz.com/2060508/what-amazons-18-average-hourly-wage-means-for-other-employers/

7 https://twitter.com/GregDaco/status/1448267868139884546, https://twitter.com/boes_/status/1448271173968613376, https://twitter.com/GregDaco/status/1448285034562134018

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