Inflation is still a strong factor in our economy, and it’s not being tamed easily by the Fed. There are tentative signs that it is beginning to ease--something the Biden Administration promised a year ago when they said the steep hike in interest rates would be temporary. In fact, the White House Council of Economic Advisors labelled inflation "unacceptably high" and a "top priority".
Inflation isn't just one number, and Americans experience rising prices differently depending on where they live. As our policymakers work to bring inflation down to a more acceptable level to ensure all Americans have access to affordable goods and services, it's worth examining why inflation hits some States harder than others. Inflation isn't the same everywhere- and it hits a lot worse if you are living in Phoenix right now, rather than in San Francisco (at 5.7%) or New York (6.6%).
In Phoenix, inflation has increased by an unlucky 13% over the past 12 months. This is higher than anywhere else in the country, and a 20-year record for any US city. While we like to rank number one and we lead the nation in positive developments like market job growth in life sciences, the cost of living is not the kind of record we want to break.
Why is inflation higher in the Phoenix area?
There are a few factors influencing inflation in the Phoenix area. The first is that our region was already hit hard by the pandemic, and so people were struggling to make ends meet even before prices rose.
The second factor is that we're a desert city, which means we must import a lot of what we consume. These transportation costs make us especially vulnerable to the nationwide fluctuations in gasoline prices.
The third factor is rapid population growth in Phoenix (another national record), which means there is more demand for goods and services than there is supply. High growth is a Catch-22, because we benefit from it in terms of job creation and economic development, but it also increases the cost of living. Many of the goods and services that we rely on - like transportation and housing - are in short supply, driving up prices. When demand exceeds supply, prices go up. We're acquiring residents faster than we can build new homes, businesses, and infrastructure. This "growth premium" contributes to higher prices.
All these factors - the pandemic, our desert location, and population growth - mean that inflation has been particularly hard in Phoenix.
The strain on Phoenix’s property market
Housing has been badly hit. Again, Phoenix holds another record we don't want: we have the dubious honor of leading the nation in "size reduction". This refers to how much smaller in size a million-dollar property is compared to the rest of the country. Our million-dollar homes have shrunk by an average of 1,000 square feet. They have fewer bathrooms, are older, and have significantly less square footage.
While this may be good news for homeowners or retirees looking to sell, it is bad news for those looking to purchase a home in the area. Rent is also rising as more people move to Phoenix and compete for housing.
This has led to a 21% inflation in rent costs. As many retirees downscale and rent, this puts even more strain on their fixed incomes and savings.
What does inflation mean for your retirement?
Inflation squeezes household budgets and reduces purchasing power. If you retire in Phoenix, the cost of living is likely to continue to rise. This may make it difficult pay bills, buy groceries, and afford other essentials.
Although Social Security benefits do increase with inflation, they may not keep up with rising costs. While the Consumer Price Index (CPI) is used to adjust Social Security payments each year, you can't rely on the Cost of Living Adjustment (COLA) if you live in an area with high inflation.
COLA is based on the national CPI - and it does not take into account regional differences in inflation rates. This means that current and future retirees in Phoenix need to be made aware of the actual costs of living in their region and make their plans accordingly.
How to protect yourself from inflation
If you are retired or close to retirement, you might want to consider relocating to an area with a lower cost of living. This will help stretch your retirement savings further. You can take advantage of the soaring house prices in Phoenix and sell your property, using the proceeds to buy a more affordable home elsewhere - perhaps in a dream location.
Staying in Phoenix
Of course, moving isn't always possible or desirable. If you love living in Phoenix, or have ties to the area through family and friends, there are still ways you can help safeguard your retirement savings from inflation. One is to make sure that your portfolio is diversified and includes assets that perform well in an inflationary environment.
Another way to fight inflation is to choose investments that have the potential to outpace it. This includes buying stocks from companies with "pricing power". This means that they can raise their prices without losing customers. For example, companies that profit from trends like digitalization and health consciousness, or that provide essential items like energy or housing, tend to have pricing power.
You can also look for stocks that pay dividends, as these can offset the effects of inflation. However, it's important to remember that investments go down as well as up, so you could still lose money.
Bonds can offer some protection against inflation, although not as much as stocks. In general, the longer a bond's maturity, the greater its sensitivity to interest rates. This is because bonds with longer maturities have fixed interest payments, so if interest rates increases, the real value of those payments decreases. Short-term bonds are less affected.
You can hedge against interest rate / inflation risk by investing in TIPS (Treasury Inflation-Protected Securities). These are bonds issued by the government that offer a fixed rate of return, but the principal is adjusted for inflation.
Another way to help offset the effects of inflation is to own physical assets such as precious metals (gold), real estate, artwork and/or collectibles. These can provide protection against inflation, because when prices go up, the value of such assets tends to increase as well.
Working during retirement
If you're relying on fixed incomes in retirement - such as pensions or annuities - you might consider working part-time or taking on a "gig" to supplement your income and offset the rising costs. We have some ideas here that could combine your hobbies and experience with flexible work hours. And be sure to delay your retirement if it is feasible for you to get the full advantage of your Social Security benefits.
Plan ahead with a Fee-Only Financial Advisor to protect your retirement from inflation
No one can predict the future, and it's impossible to say exactly how much inflation will affect your retirement. However, by being mindful of the issue and taking steps now, you can secure the retirement you've always dreamed of. The best way to fight inflation is to be prepared.
If you don't already have a plan in place, now is the time to reach out to a Fee-Only Financial Advisor. We can help create a personalized retirement plan that will consider your unique circumstances. We can make sure that your portfolio is diversified and includes investments that will perform well in an inflationary environment.
For impartial professional advice, contact us today to get started.