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August economic outlook: How to outbox whatever comes next

Quick takeaways

  • What are your real-life responses to inflation? No one is sure when price pressures will ease, and only you can adjust your budget—more bulk purchases at the grocery store, walking or biking in lieu of driving—to focus on the things that are important to you.
  • Whether or not a recession happens is anyone’s guess. Some signs point to a downturn, while others are less clear. Before you jump to conclusions about the state of the world tomorrow (or next month), find a trusted, unbiased source to help you understand a key economic or financial term so you’re better informed before you click on an alarmist headline.

It feels like the economic blows keep coming. Your grocery bills are up. It takes a small fortune to fill a gas tank. The stock market won’t stop yo-yoing. The Federal Reserve will probably hike interest rates again soon.

All those hits can have you feeling like a boxer in the ring, taking one too many punches, looking for a way out of the fight. But maybe, instead of escaping, you can stay in the ring. To do so, you might need to learn from one of the greatest boxers in history, Muhammad Ali: Float like a butterfly, sting like a bee.

Floating with inflation

Inflation is a tricky problem: It seems to go up overnight, but doesn’t come down all that quickly, even when institutions and governments execute big policy shifts. For example, when the Fed raised interest rates this spring, the cost to own a home or a car immediately got more spendy. That made a lot of people think differently about, and perhaps delay, big outlays. But to really tame inflation, we have to slow the giant engine of consumer demand. And that takes time.

“Consumerism has really changed our set of expectations, sometimes for the good and sometimes for the bad,” says Heather Winston, director of individual solutions at Principal®. “We’re in a time when we might have to want and buy less.”

For many of us, this bout of inflation is our only experience with sustained, impactful, across-the-board price increases. In fact, inflation has been extraordinarily low in recent history; not since the 1970s has it edged above 6%. For some people, current inflationary pressures are unpleasant; for those facing heightened financial insecurity, price increases can be destabilizing. But for all of us, the stickiness of inflation may be a time for reflection.

“If you think about inflation as a hit, and you’re the boxer, you have to think about how to be quick on your feet and get hit less,” Winston says. “When you’re going through it, it can be painful and you don’t know how long the round—inflation—is going to last. For the average investor it can be really difficult to understand when the bell is going to ring so you can regroup and move to the next round.”

Your wallet: “Inflation is causing all of us to make tradeoffs for the quality of life we want to have,” Winston says. Adjusting temporarily can help, so that you don’t have to change permanently when it comes to your short- and long-term financial goals. For example, maybe you’re saving for a house and are wary of rising interest rates. If home ownership is the goal, how can you pivot knowing the mortgage will cost more for the foreseeable future? Are the houses you look at smaller, or can you wait a little longer to save a bigger down payment?

Learn more: Get five tips to figure out how much home you can afford.

Avoiding the sting of a recession

Lately, experts and pundits are pontificating a lot more about a recession. They’ve put their bets on the likelihood of it happening in the next year or two, and that’s causing much consumer anxiety.

Do any of them know for sure? Not really, and plenty of signs remain muddled. For example, stocks are in bear territory, but corporate earnings (and cash) are topping records. Real gross domestic product growth is declining, but the unemployment rate continues to be low—and hours worked (another measure of a slowdown) are strong.

“Typically, recessions follow bear markets—but not always,” Winston says. “If you’re concerned about what you see, get some background. You’re not going to leave that boxing ring. Learning more is going to help you absorb and deflect blows so that you don’t take a knockout punch.”

One thing to keep in mind is that if a recession happens, that doesn’t mean it’ll look like any recession of the past. Downturns have hit in all sorts of job markets and inflationary periods, for one, and they can be either deep or shallow, short or long.

“It may be helpful to look back at history, not because we’re doomed to repeat ourselves, but for context,” Winston says. “We’ve been through this before. What’s different is the combination of factors and what the world looks like today.”

Recession or not, we’re all learning, in real time, about a challenging economic outlook that isn’t as simple to fix as we might have thought (or hoped). “But the things that matter to you haven’t changed, and hopefully your goals—when you retire, where you live, what you drive—can adapt,” Winston says. “Every economic decision comes with tradeoffs and the need to prioritize. Right now, the economy is presenting you with adversity, and you have to choose what to do next.”

Your wallet: Paying attention to your retirement accounts at regular intervals is something you can do no matter whether it’s boom times or down times. Do you need to reallocate your retirement savings assets, or adjust your risk profile? Those are concrete actions that offer a foundational check-in for every person.

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The views and opinions expressed are for informational and educational purposes only as of the date noted and should not be considered investment advice. No forecast based on the opinions expressed can be guaranteed and may be subject to change without notice. No investment strategy, such as diversification, can guarantee profit or protect against loss.

Investment advisory products offered through Principal Advised Services, LLC. Principal Advised Services is a member of the Principal Financial Group®, Des Moines, IA 50392.

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