Inflation Update & Year End Tips

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Inflation Update & Year End Tips

In this podcast, we want to provide interesting and practical content that can help you make better financial decisions. Today, we are going to talk about some year end financial tips, some things you may want to consider as 2022 wraps up. We are also going to talk about the recent inflation report and what our forecast is for inflation in the future.

The PCE inflation report came out at the end of last week. The PCE is the Fed’s preferred inflation gauge. The good news is that inflation continues to cool. The year over year increase in prices are down from the previous month. This is encouraging, but I wouldn’t get your hopes too high that inflation will be gone any time soon. Even though inflation is moderating, it was still up 5.5% from the same month a last year. That’s still high inflation – we’ve got a long way to go. It is true that inflation is being impacted by higher interest rates on the demand side.  The Fed has now pushed the prime rate up to 7.5% and has indirectly affected mortgage rates, which are hovering a little below or above 7%, depending on the day. Ask nearly anyone in any business and they will tell you there is a definite slowing down in demand. But demand is not the only thing being affected by higher interest rates – supply is also affected. So even though the supply chain has healed greatly, allowing some good prices to start easing, the services chain is still in rough shape. We’ve got more demand for services than we have people to meet that demand. Restaurants and hotels can’t find enough workers and building trades have still not caught up from their backlog. So even though there is some good news that the worst of inflation may be behind us, I’m of the opinion that higher than normal inflation will be with us for some time. Here are my primary two reasons:

The first is a shortage of labor. We simply don’t have enough people to match up with all the jobs that are available in today’s economy. I believe that is an important distinction. We have a lot of people looking for jobs, but matching them up to the jobs available has been a real challenge. There are many instances where jobs are available, but no one wants to do them such as in the housekeeping industry or cleaning industry. This is going to cause certain industries to automate even more. Take the restaurant industry for example, within the next couple of years we’ll be ordering from a kiosk at our tables rather than having a server take the order. For those jobs that can be automated, they will be. Some of these jobs that are difficult to fill were worked by immigrants – but with the host of challenges regarding immigration now, many of these workers are simply not available. Job mismatches will continue. Lack of training for certain jobs will continue, and perhaps worst of all, lack of motivation to work among certain citizens will continue. For those motivated to work, they should not have trouble finding a job. It may not be the job they want, but that is one of the factors contributing to the problem. Maybe we don’t need to be quite so picky.

The second reason I believe inflation will be stubborn on the way down is the theme of reshoring. For years and years, we were offshoring, sending work to other parts of the world where it could be done cheaper, which helped keep prices at bay domestically. More and more companies will source their products domestically rather than running the geo-political risk of outsourcing overseas. The war in Ukraine and icy relations with China have cemented this trajectory. Look no further than the new Ford plant being built in West TN to see this theme in action. The battery plant that will supply Ford’s new electric F-150’s will be right next door and multiple suppliers will end up locating within a 60-mile radius of this plant. For many businesses, they are going to try and vertically integrate. Apple does this; they are building their own chip so that they wouldn’t be dependent on other companies. You are going to see more large companies try to fill in the pieces of the supply chain in house. With less competition globally, that is good for American jobs, but bad for inflation. Competition helps keep prices down, and competition is impacted dramatically by the environments we find ourselves in. After not seeing any meaningful sustained inflation for over 30 years, it’s back whether we like it or not, and I’m afraid it is here to stay longer than people think.

What can you do to adjust to this new normal?

Pick up some extra work. There are companies everywhere hiring, so see if there are some things you can do from home at night or on the weekend. There are a lot of virtual jobs people are able to pick up a few hours here and there. Consider that if inflation is making it difficult for you to make ends meet.

Transition from a purchase mindset to a maintenance mindset. Get creative on how to keep things running. One of my relatives recently had a pipe to burst during the cold spell we had. She got on YouTube and learned how to fix it herself. More and more of us may have to learn some basic maintenance skills to save money and time for that matter, because people are backed up so far. Be willing to fix things rather than buy new things. It’s true that some old things eventually become money pits and need to be scrapped. But more often than not, fixing what you have will be cheaper than buying something new. Try to transition your mindset from buying the next new thing to seeing how long you can keep a car, or dishwasher, or ac unit running as an example.

Make meal plans. Much of our spending on eating out is from a lack of advance preparation. Plan out your meals a week in advance to make sure you are shopping wisely, only buying what you need, and utilizing all of your leftovers. You want to try and avoid the “what do you want to eat” conversation at 6:00 in the evening when you don’t have much time or energy to prepare food at home.

Well, it’s the end of the year. I can’t believe it, and many of you might recognize time continues to march on and it seems to speed up as it goes. And you might be wondering what you can do financially to finish the year well. Here are a few suggestions.

Take time to give. I know that’s hard to consider if you are barely making ends meet but giving is one of the most rewarding of financial experiences. Coming off of the Christmas holiday, it is great to have a giving mindset that extends beyond family and out to those in need. And if you are blessed with more than you need – by all means, share it. Don’t let the year get in the books without having given of the blessings you’ve been given in 2022.

Review your spending for the year. Many of you will have no idea how much you spent on groceries or gas in 2022. You simply must have a mechanism to measure this if you want to win financially. You know prices are higher, but how much has it affected the money going out? Look through your statements or your online financial tools and try and figure out how much you’ve spent so you can have a starting point for spending goals in 2023. Some of you may use Mint.com or You Need A Budget or other online tool. Those are great tools, but not unless you review them to see how much you actually spent.

Identify what went wrong financially in 2022. Sometimes we need to perform financial autopsies. For many, you’ll reply, “I didn’t plan for my pipes to burst”, or “how was I supposed to know that my heating unit would go out?” See what didn’t go well in 2022, and plan to make adjustments in 2023. In some ways, reviewing your spending habits for the year is like reviewing a game film, analyzing what you can do better in the future. If you don’t have a reserve fund, this needs to be a high priority to account for all of the things that you can’t see coming.

Lastly, solidify the difference between needs and wants as you review your purchases in 2022. So often we can’t make ends meet because our wants are bigger than our resources. The truth for all of us is that we simply don’t need as much stuff as we have. Across the income spectrum, it is easy to confuse wants with needs. We create unnecessary financial anxiety and stress, wearing ourselves out to get enough, only to find that there never seems to be enough. The art of contentment is a lost one. If you are looking for help in this category, I highly recommend a book by Paul David Tripp called “Redeeming Money.” It is a Christian perspective on the heart and how our finances are affected by our heart. More than sharing financial tips – this book gets at the heart of what drives our financial decisions in the first place.

At MBC/Foundation bank we find ourselves incredibly grateful for the Lord’s blessings in 2022. We’ve had a record year of loan growth and have seen additional fruit from taking time to build relationships the right way. If you’re a client of ours, we want to say thank you for your continued trust. We are working hard every day to continue earning it. If you’re not a client of ours, we invite you to experience a different kind of banking – one that focuses on giving you financial solutions, not merely financial products.  We hope you will explore our website start your financial conversation today. If you’ve found this podcast helpful personally, we hope you’ll subscribe to it in your favorite podcast app and share it on social media. And until our next podcast in 2023, God bless you.

-President Chad P. Wilson, CFP

Today’s episode of “Money Matters” was written and recorded by President Chad P. Wilson of McKenzie Banking Company / Foundation Bank on December 28, 2022. This episode does not constitute financial advice. Please consult a financial professional to discuss your specific needs. MBC/Foundation Bank is an Equal Housing Lender, Member FDIC.