Inflation by Guy Williams
What is it? Why should I care? And why are many economists predicting that we are about to enter another inflationary time period?
Inflation means that prices are going up.
A cup of coffee that cost $1.50 last year now costs 1.75, a loaf of French bread was 99 cents, now it’s $1.10, movie tickets were 10.00, now they are 11.00.
When these changes accumulate across the economy, we have inflation. Changes in grocery items and entertainment are manageable, since you can consume less or switch from movies to streaming videos.
Inflation becomes a problem when general price levels begin to move up. When this happens almost all grocery prices go up, every entertainment option costs more, and everything else from furniture to houses costs more.
When everything becomes more expensive, and your income doesn’t go up as fast as prices do, you have an inflation problem.
The results of the general price level increase without a similar income increase mean that your standard of living is going down. This is the economist’s way of saying that you can’t live the way you used to. In order to make ends meet, you will need to switch to cheaper items, think catfish instead of shrimp, a Destin vacation instead of Disney World.
General price level inflation is a global economic problem that you can’t control so it is important to make financial changes that protect you. The first step is to change your loans from floating rates to fixed rates. Mortgage rates have increased from historic low levels, but if you have a floating rate loan, it is still important to change from a floating rate to a fixed rate. On the investment side, you need to look for floating rate investments, the opposite of your goal for your loans. You want to receive floating rate payments, and make fixed rate payments, that way if prices go up, you gain. If you own bonds or a bond fund as part of a prudent investment diversification, now is the time to switch from fixed rate bond to floating rate bonds.
You will also want to lock in as many of your costs as possible, think of the payment options that allow for a one two or three-year renewal option. If you really like and expect to use the service, go for the longest renewal possible. These also usually have the lowest price per month, so you win twice. This strategy can also work for rental rates, if you rent an apartment, offer to sign a longer lease in exchange for a hopefully lower rate or at least lock in the same rate for a longer time.
Our expectation is that inflation will increase from the current 2% per year rate to something closer to 3% per year. Unfortunately, if there is no move to balance local and international budgets, even higher rates of inflation are a real possibility. So, do what you can to insulate yourself, and to the extent that you are politically involved, vote for and encourage politicians at all levels to do what we have to do with our budgets, reduce spending to match the cash that you have.
Most inflationary cycles begin slowly and initially seem harmless. As inflation increases, people begin to suffer, especially those on fixed incomes. When inflation really heats up, the economy gets disrupted, young people are priced out of the housing market, and many people suffer as ordinary goods and services become unaffordable. The end of this type of inflationary cycle is almost always ugly with a steep recession, lots of unemployment and many bankruptcies. For this reason, it is in all of our best interests to avoid rapid inflation. If you want to see real life hyperinflation, look up economics in Venezuela. We don’t want that to happen here.
Guy Williams is president and chief executive officer of Gulf Coast Bank and Trust Company. Their Kenner branch office is located at 3410 Williams Boulevard. Marcel Gonzalez, vice-president and branch manager can be contacted at 565-3656. Brian Behlar, vice president and commercial lender, can be contacted at 565-3661. Visit Gulf Coast Bank and Trust’s website at www.gulfbank.com.
Article Posted On: April 25, 2018 - By: Allie Munster