Last week, we saw Year over Year inflation numbers for the month of March and the results were worse than we expected. With the annual inflation rate at 8.5%, Michael Wallin and Stacey Andres wanted to revisit our discussion of inflation.
First, we define inflation and talk about how it's measured. Michael looks at what goods cost from 1972 to 2002 and now 2022. And we talk about what all these numbers mean for you, as the listener.
Inflation doesn't affect everyone the same. We talk about factors such as location, income level, socioeconomic status, and need. For example. the high price of cars doesn't affect you if you're not buying a car.
Again, the three factors driving inflation are Money Supply, Supply and Demand, and Energy. We take a look at where we stand in each of these areas and how current policies in Washington are affecting them.
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Jag: Welcome back to the Art of Wealth Unbroken podcast. We're here each and every week to help you better navigate these economic times. We're here to discuss thoughts and ideas in the field of finance and retirement, as well as discuss trending topics that could impact your wealth and how long it lasts.
These discussions can help you make better informed decisions so you can make better financial choices. Either with the wealth you have built or are building and live the lifestyle you imagined for retirement. Stacey Andres is a registered financial consultant and Michael Wallen is a certified financial planner.
I'm Jon Jag Gay and for our topic today, very appropriately, we are going to revisit the topic of inflation.
Stacey: Hello, Jag. Hello, Michael. Michael, good to have you back,
Michael: Jag. Stacey, good to be back with you both.
Stacey: So, Jag, as you mentioned, we're going to revisit a topic that we discuss really just a few weeks ago in episode four.
And that is inflation. Last week. March's year over year inflation numbers came out and while the consensus leading into that was that inflation was going to be lower than what we had seen in January and February, the exact opposite turned out to be true. And March numbers showed an annual inflation rate of 8.5%.
That was a pretty significant increase. That's a big number. But it's very interesting because the way inflation is calculated today is very different than it was in the nineties. And then one thing that I think is important to note here is that if we looked at the way inflation was calculated back in the nineties, still the real number that actually is hitting our pocket books as closer to 13%. May even be higher than that.
Jag: Clutching my pearls over here.
Stacey: Absolutely. Absolutely. So Mike, as we talk about these numbers, everybody understands that the cost of goods and services has gone up dramatically, but what may not be fully understood is what inflation is, and more importantly, Kind of how that works.
Jag: I'm glad you asked that question, Stacey. Mike, let's dig into that for our listeners. And first answer the basic question. What is inflation?
Michael: Well, inflation is the overall increase in the prices of goods and services in an economy. And what tends to happen there is we have way more dollars chasing fewer goods.
And so over time, our currency, our fiat, the dollars, the bills and the coins that we have in our pocket end up losing value. And it doesn't have as much purchasing power as it once did. In other words, whatever a dollar could buy is reduced over time. Inflation can occur for a variety of reasons. We see that when we have higher wages, lower interest rates, supply chain issues, or broader issues in the global economy.
And just those four topics, I just mentioned, we're beyond the trifecta. We're getting all four of those in the current times, but let me just share three examples that I think are very important to understand. And I think everybody that's listening to this can relate to.
If we went back to 1972, go back 50 years ago. The median home price was $30,500. Gas prices were 36 cents a gallon, a dozen eggs cost 52 cents. So when we took our dollar and we went out there in the open market, what was that $1 able to actually buy it? Now let's move up just 30 years to 2002, the median home price went from $30,000 to $182,000. Gas prices went from the 36 cents a gallon to a $1.36 a gallon.
That's a 400% increase in the cost on a dozen eggs. It went from 52 cents up to $1.03. That's a 200% increase in the cost of those eggs. Now that was what was happening in 2002. If we just take those same three items and go. 2022, the median home price is $392,000. Gasoline today is $4 and 22 cents a gallon.
And that's only if you take the median, if you happen to be in maybe one of the coastlines, whether California. or you go up to Boston or New York, you know, those prices could be substantially higher on a per gallon basis is. A dozen eggs, $2. 65. We are seeing a trending of the cost of goods going up.
And when you look at inflation, it's very relevant to the area that you live in. And what are you actually buying? So everybody's inflation rate is going to be different, and it's why it's so important to really sit down and understand one's budget, to understand what is the true impact of inflation on yourself.
Jag: So you mentioned my hometown of Boston, where I grew up. So I can tell you that my friends and family they're telling you right now that gas is wicked high. Mike, how do we measure inflation?
Michael: Well, the measurement of inflation is we start looking at how does those prices go up? What are those goods that we're buying and how is that impacting our buying power?
I think it's very relevant also to looking at an individual that let's just say their personal budget. If you're on a fixed income, it's going to be substantially higher. But the consumer price index is what the government gives us. And in that consumer price index, it comes out of the bureau of labor statistics.
They are looking at a basket of goods and services. The problem is. Food and energy has been removed. As Stacey referred to earlier. Food and energy has been removed out of that basket of goods. Now there's a four categories of purchases covered by the CPI-U which is food, energy, commodities, like cars and clothes and services like rent and health.
Not all categories are considered equally when generating the overall measure of inflation. Each category has a relative importance factor. That's based onto it. Services typically are given highest relative importance, followed by commodities food, and then. The overall CPI is known as the headline CPI. It's measured by the percent change and those categories from one period to another, just like I illustrated from 72 to 2002 to 2022. And I wish we had a crystal ball that I could project out what the next 10 years or 20 years is going to be, because I think that's the point of relevance for all of our listeners today is, do you understand what your future expenses could look like? And are you taking action today? To make sure you're going to be positioned well, 10 years from now or 20 years from now against what those future inflationary costs are going to be.
Jag: Crystal ball could be scary. So I know the both of you live in numbers.
It's how you make your living. And you look at numbers and statistics all day. You threw some, some acronyms and some numbers out there. Mike, what does it mean bottom line for our list?
Michael: For the average family, this is costing them additional $385 a month or $4,620 a year. Now that said it is important to note that although inflation is very real, we are all feeling it.
Inflated prices don't necessarily hurt all consumers the same. It is only those that are making those purchases, that experience the increase.
Stacey: Okay. So I think that is a great point, Michael. I understand completely where I'm in the industry. I understand what you mean by your last point. Which goes back to a little bit of how does the CPI calculate exact inflation rates, but can you give an example of how inflation is not really impacting everyone the same across the board, in all areas of the country?
Michael: I think it's a great point. So as an example, For much of the past year, new auto prices have jumped because of vehicle shortages driven by a lack of components, such as semiconductors. We have seen all the big automotive companies out there that have had a lack of inventory on their car lots. We can drive by there and we used to see a hundred, 200 cars on a lot. And now we're seeing maybe 50.
Jag: And some tumbleweed.
Michael: Yeah. And some tumbleweed because we outsource computer chips over to other countries such as China. And because of those supply chain disruptions, we have not had those computer chips to put into the new vehicles so that we have that inventory. Now, if you go out and you're wanting to buy a new vehicle today, those prices have increased dramatically and such, I mean, you may be looking at a new vehicle that the price may be $40, $50,000 for that vehicle.
Now, if you're in the purchasing of that automobile, the cost push inflation because of those semiconductors. Those computer chips has driven up the price on those automobiles. You would be impacted by inflation, but if you're not in the market for a new vehicle, you're not being impacted by that purchase. And that's why it's the difference of how some items will impact you? Some items are not because you're not in the market of purchasing those items at this time.
Stacey: Yeah, that makes a lot of sense. I have a chiropractor, actually. He had a vehicle that was three years, four years old, and went to look at a new vehicle.
His used vehicle, they gave him the same amount of money with 50,000 miles on it as what he paid for that when he bought it new and basically he was able to make a trade straight across. So because of that, the shortage of the new vehicles. Yeah. The used vehicle price has skyrocketed, but you're right.
Not everybody needs to purchase a new vehicle. Well, some of those people that I know they're putting that on hold, but in general, when you look at the overall population, what group do you feel is going to be hardest hit with inflation? Continuing to increase at the rate that it is right now, as we look forward throughout the rest of 2022 and 2023 and beyond?
Michael: I think there's really two subsets it's lower income earners that could be retirees, but it also could be individuals that are on a fixed income or maybe new retirees that are coming into the marketplace that, maybe they're graduating from school today and they don't have high wages.
They are going to be impacted because when you're in retirement, our on fixed incomes, the higher prices for groceries, gasoline housing, especially if they are running because they spend a larger portion of their budget on these items. They have less disposable income, but there is no discrimination when it comes to purchasing groceries.
If you go and you get a basket of goods and you go up to the register and you purchase the less items, nobody shows a tax return to see what level of taxable income you have. They are not looking at social economic dispersion between those. So an individual on lower income is paying the exact same prices on groceries as somebody that may make four times, five times or a hundred times more revenue than that individual is so lower income earners are heavily impacted by rising cost of goods and services.
Stacey: Okay. So let's dig into that just a little bit more because I think this next point that we want to talk about is really important for our listeners consumers across the board to understand. So in episode four, our discussion centered around the three core factors that drive inflation. We've talked about money supply, supply and demand, and energy.
However, what is behind each of these factors? There's other forces that often do not get talked about are not a part of the discussion. So I am an immigrant to this country. I came here in 1996, so still relatively new to this country compared to a lot of people. But one of the things that surprised me that when Trump became president was how quickly he was able to turn around a fledgling economy, and just bring it roaring back to life in such a short period of time. I thought there's no way that he's going to be able to fulfill those promises that he was making, but literally within months of him taking office, it was the first time I realized how dramatically and administration's policies play a role in our economy and how it affects an individual or a family's bottom line.
But as quickly as Trump's policies impacted the economy for good, by making things more affordable and giving us more disposable income Biden's policies did the exact opposite. And if you go back and if you pull up a chart and look at the numbers of year over year inflation rates, you can see that literally within months of taking office, inflation started to hit our economy in a dramatic fashion and it started to skyrocket. And so one of the things the Biden said when he was running for President is that his administration would absolutely not raise taxes on the working class. But when you think about inflation, Michael isn't inflation, really a form of taxation?
Michael: It often is referred to as a hidden tax. I call it the silent killer because most people don't really understand how that's going to happen. You know, in the medical field, we hear cholesterol is the silent killer because it leads to heart attacks and heart disease. Well, inflation very similar is the silent killer to an individual's budget because many consumers it yields far more literal tax increase as tax brackets, fail to adjust for changes in the consumer purchasing power. This phenomenon is called bracket creep. Often overlooked is what happens to federal and state tax burdens. When inflation is high, when tax brackets, the standard deduction or personal exemptions are not inflation adjusted, they lose value due to inflation, and that's where most individuals out there, Stacey are not going to understand how that is truly impacted.
Stacey: So now here's the kicker. Like when you look at a state that has federal and state income tax, if those are not inflation indexed, due to a family's increase in income, a family is actually going to pay more in taxes because of the increased income, but due to inflation, they're going to have a lower standard of living.
And so if we look at the three factors that influence inflation that we talked about in episode 4, I want to just take a quick look at how the Biden administration's policies are causing inflation to drive each of these factors. So the first one, the money supply, this is not just a Biden thing because this all started under Trump, but for the past two years, money has been incredibly cheap to borrow. Stimulus checks have been sent out and there have been more than $14 trillion thrown into our economy. This is money that did not exist, but now it does. And every time a new dollar is created out of thin air, the dollar that you own actually has less buying power. The dollar that's in your pocket.
The second was supply and demand. So much of the blame here is placed on supply chain shortages, and that we do not have enough people working to able to fill the vacant jobs. While, there might be some truth to that. This area contains a lot of hidden data that nobody is seeming to talk about. And that is the fact that this administration continues to pay people to stay home and not with.
Just last week, this administration made a decision to continue on with a COVID release stimulus package. And this is preventing millions of people from entering the labor market because they can literally make more money by staying home and not working. Jerome Powell came out, he's the federal reserve chairman.
He stated that their idea, what inflation was and how it was going to impact the economy was completely wrong. And others in the federal reserve are actually saying that this is a self-created labor shortage. And the result is that our country, right now, we have higher inflation than any other industrialized country in the world. So, Mike, do you want to touch on the third one on energy?.
Michael: Yeah, Stacey. While the Biden administration is trying to create a narrative that the gas prices is due to the invasion of Russia into the Ukraine. That truth is energy prices were skyrocketing long before the war broke out. Rising energy prices are a result of the current administration's policy of stopping the oil coming through our pipeline moving from energy independence to be independent again for importing.
Under Trump's administration for a brief period of time, we had energy independence. We were not relying up on other countries. So we did not experience the inflation because of those rising costs that is being pushed down to distribution channels, to distribute the goods and services across the country.
So we're seeing many layers, like we said before, there are not just one thing that we can point to. There is multiple areas that are impacting the inflation and the rising costs that the consumers are experiencing today in America.
Jag: Gentlemen, we've covered a lot today when it comes to inflation, it is certainly the topic du jour. As we look at the financial media and how it's just affecting people's bottom line, whether you look at the dollar amount, the statistics, or just how it's affecting our listeners in their day-to-day lives.
If you want to know more about what Michael and Stacey do, if you want to talk to them about planning for your financial future, your retirement, you can find out more on our website, artofwealthunbroken.com. Again, that is artofwealthunbroken.com. And guys, give me the phone number two real quick before we go.
Michael: 855-378-1806. 855-378-1806.
Jag: Gentlemen, always a pleasure. We'll talk to you next week.
Stacey: Thank you for your time, Jag. Appreciate it.
Michael: Thanks Jag
Jag: INvestment advisory services offered through optimized advisory services, LLC. An sec registered investment advisor, optimize only transacts business in states where it is properly licensed or excluded or exempted from registration requirements.