Broker Check

Inflation: Causes, Impacts and Expectations

In this episode, Royal Standley discusses the top four reasons he sees for inflation in the US. Royal explains where we’ve seen the biggest impact as well as what the government and Americans can do to help minimize the financial impact of rising costs and mortgage rates.

Episode 71 Transcript

Intro: Royal Standley of Oregon Pacific Financial Advisors, offering securities through United Planners Financial Services, member FINRA, SIPC, guides clients with empathy in discovering and reaching their financial goals and creates financial plans for clients so they can live their lives by design. In these episodes, he relates his expert financial insights and discusses timely topics. Royal strives for excellence and has a passion for sharing his knowledge and supporting his community. Now onto the show.

Aric Johnson: Hey, Royal, how you been?

Royal Standley: I'm good. How are you doing, Aric?

Aric: I'm fantastic. I'm so excited to get into today's podcast, but you are in a highly regulated industry.

Royal: Yes, I am.

Aric: And because of that, sometimes we have a disclosure that needs to be read, so let's do it.

Royal: All right. Here's the disclosure for today. Discussions in this show are for educational purposes only. Information presented should not be considered specific investment advice or a recommendation to take any particular course of action. Always consult with a financial professional regarding your personal situation before making any financial decisions. The views and opinions expressed are based on current economic and marketing conditions and are subject to change. All investing involves risk, including the potential for loss of. Securities offered through United Planners Financial Services member FINRA, SIPC. Advisory service offered through Oregon Pacific Financial Advisors, Inc. Oregon Pacific Financial Advisors and United Planners are independent companies, and neither Oregon Pacific Financial Advisors nor United Planners offers tax or legal advice.

Aric: Okay, now that we've taken our medicine, can we get on with the show?

Royal: Let's go.

Aric: Hello and welcome to Life by Design with Royal Standley of Oregon Pacific Financial Advisors. Royal, what's going on?

Royal: Nothing much, just in enjoying the change we have right now into the fall months and, the creep of winter and it’s cold here in Oregon.

Aric: Yeah. The creep of winter is right. Just creeping around, waiting to strike. Just-

Royal: Exactly.

Aric: I don't have a very good outlook right now of winter. Maybe it's cuz I'm old. I don't know. You know?

Royal: Yeah. That cold gets in your bones now, right?

Aric: Yeah. Didn't used to do that, so, Yeah.

Royal: No, my, my father always hated Oregon because he grew up in Texas and lived in San Diego for years, It's just like the cold gets in my bones and I, I couldn't understand it until I turned 40 and then it's like, okay, I can feel that I get that.

Aric: Yeah. Yeah. Now we understand all the, all the issues.

Royal: Yes.

Aric: All right. Uh, we're not here to talk about our bones. Uh, Royal, what are we talking about today?

Royal: Well, I thought we would spend some time on the big topic this year, which is inflation.

Aric: Okay.

Royal: This year has really been defined by runaway inflation here in the economy in the US and across the world. There's a lot of different reasons for it. There's the response by the Fed and the US government to try to fight inflation, and I thought we'd just spend some time kind of talking about those root causes and then also just shift into things I'm talking to clients about when it comes to inflation, this environment that we're in, that I think we should be considering. Making sure that, we're gonna get through this period of high inflation and possibly take advantage of, uh, some of the things we're gonna see here, over probably the next 18 months at least.

Aric: Yeah, well, I was wrong. We are talking about our bones because I, at this point, I kind of feel like inflation has gotten into my bones. It's not a good feeling. It's kind of achy, right. it makes me move a little slower, maybe. to, to make purchases or move a little slower in general, it's not easy. So, I mean, that makes a lot of sense. And there's a lot of different pieces of inflation. How we're gonna tackle this today?

Royal: Yeah. So, I thought we would just go over kind of the, uh, the top four reasons I'm seeing for why we have inflation here in the US. Uh, and then we can kind of go from there and broaden our conversation. So I, I think we go back to Covid as we always do.

Aric: Mm-hmm.

Royal: Uh, March, 2020, the US government shuts down the, uh, the economy.

Aric: Yeah.

Royal: Now in, in 2020, they pushed out a lot of stimulus, which was very warranted. We needed to do that as we basically made people stay home. We shut down restaurants, we shut down businesses.

Aric: Mm-hmm.

Royal: And then they did it again in 2021, as I think most people were beginning to, figure out what this new normal looked like. Businesses were reopening. That second wave of stimulus, which was, just as big if not a little bit bigger than what we got in 2020, I think is really what might have spurred on some of these higher asset prices as we pumped in trillions of dollars of, wealth into the economy to re-inflate it out of the recession that was caused by Covid.

Aric: Mm-hmm.

Royal: And those extra dollars have a tendency to create inflation. As you have more dollars chasing fewer and fewer goods, that's gonna drive prices up. The other big issue that I see here is oil prices with the war in Ukraine, we really had a spike there in oil. You always have what the OPEC nations are doing, what Russia is doing, what Venezuela is doing as far as to manipulate those oil prices. But I think the war in the Ukraine was really that piece that set off where we're at right now. Now oil, we think of that primarily as a commodity. We think of that as, hey, I need to go fill up my, my car with gas, if you, if you're not driving to Tesla already.

Aric: Mm-hmm.

Royal: So, the issue with oil is oil is a component in everything.

Aric: Yeah.

Royal: If you're gonna buy a good, you are probably going to have to have it shipped to you. And that shipping cost just adds more and more to inflation. So, with oil cresting kind of that, the $125 a barrel level and with gas at $5 a gallon, all of those things factor into the price of goods. You know, you also have some, some much higher, food costs as well that's gonna be greatly affected by oil. Just getting food out of the ground, getting it shipped to the stores, all of those things add to that. You also had that global supply chain shortage that we're still kind of working through. You don't hear as much about it, but it's still an issue there. and those shortages also pushed up those cost of goods as well. And then finally you had, you know what, a lot of people are calling the great resignation, which we really saw anybody who was near retirement just got out.

Aric: Mm-hmm.

Royal: If, if you were a year or two or three years away from retirement and planning on working those last couple of years and Covid hit, it was kind of, hey, let's accelerate this. If we can do it, let's get out. We might have to make some adjustments here or there.

And then you also had a lot of people make some decisions about how they want to lead their lives. I think a lot of people reevaluated things in 2020 and 2021 and said, well, if we do these three things, if we move to this city or you know, a cheaper piece of property or cheaper house and maybe only one of us has to work as we're raising our family. A lot of people made those decisions. So we had such a great reduction in the workforce there.

Aric: Mm-hmm.

Royal: That it's just been a struggle for people to find workers for their businesses, and we're still seeing more job openings out there than people who are unemployed right now looking for work, which is something that very rarely happens in the economy. So, that shortage in workers pushes wages higher. And that's a, that's a very inflationary, thing that can happen because as you're paying more for workers, those workers have more dollars in their pockets and they wanna buy more things, which pushes up the price of goods. So, all of this is pushing inflation higher and higher and creating such a, an issue for the government that, you know, we're, we're seeing, you know, inflation running about 8, 9, 10% depending on what kind of month you're looking at there for those interest rates. So, what does the government have to do to try to fight inflation? So, the number one, mechanism we have for fighting inflation is the Federal Reserve. They control the interest rates that are charged on the supply of money. They control the supply of money. So, what they have begun doing throughout this year is an aggressive push to raise interest rates. Those interest rates are, just on the, that overnight rate is what the banks charge each other to loan them money. The Feds have been raising that which pushes up all the other rates, out there in the country.

Aric: Mm-hmm.

Royal: Those rising interest rates that is designed to slow down the economy and take out the amount of excess money supply we have in the economy. So, with those higher interest rates, the thinking is, is the Fed is trying to destroy demand. They are trying to get rid of some of that excess money. They're trying to slow down the economy and therefore bring down the rate of inflation. So far with all of their interest rate increases this year, they've slowed it a little bit, but even after their Fed meeting yesterday, in November, they had to come out and say, hey, we're still seeing inflation across the board. We're gonna have to keep raising interest rates.

Aric: Mm-hmm.

Royal: I think they're being aggressive this year. My personal opinion is that they should have started in 2021.

Aric: Yep.

Royal: To start, raising that, those interest rates to slow things.

Aric: So let me ask you this. I mean, to me, as a lay person, right, you're the, you're the professional in your field, but me as a lay person, where I see that reflected most is housing, right? Because you, you saw such a demand and, and I was lucky enough, or, or my timing was correct when I sold my house in March, they hadn't raised those interest rates, but, I, I know when I put my house on the market, it was just a piranha fest, right? There were so many, I got so many offers so quickly, higher than what I was asking, and it was fantastic for me, right. For me, at that moment. And now that I see the, you know, how much they've raised the interest rate, we really have seen, at least in my area, and I've, I've talked to friends in different parts of the country, a slow down on people buying homes because that mortgage is gonna cost them a whole lot more than it used to. But that's the main place I see it. Is that what you see or are there other areas that you're really seeing this change?

Royal: That's one of the major places that we're seeing because those higher interest rates, if, if you look at the difference between the beginning of the year until now, it is about 50% more, if you're, if you're going to use a mortgage to finance the purchase of a home, it's about 50% more per month, in some cases for your mortgage payment. That is an astonishing increase in nine months.

Aric: Yeah.

Royal: So that's, that's kind of the number one place that we're seeing it, but really kind of just across the board. Housing is always such a giant factor of economic purchases across the board because you buy a new house, you gotta get a new fridge. You might wanna get a new TV. Gotta get new furniture.

Aric: Yes. Yeah.

Royal: You know, all, all of those costs go into, household creation, basically, really spur on the economy. So the fewer houses that are changing hands, the more the economy is gonna slow down, because of that. We're also starting to hear some anecdotes about, builders kind of still being busy, but starting to see maybe a slowdown coming next year on the completion of, of homes. So, all of those things are going to help slow down the economy as well as just the simple fact that you have to pay more to transact business if you're a business owner, if you need to borrow money to finance things, you're gonna pay much higher interest rate than you were a year ago.

Aric: Mm-hmm.

Royal: So all of those things are kind of factored in. It's gonna make it harder for, for folks. And let's just continue to consider people's psychology in all of this. If people think that we are going to go into a recession, or people feel like the value of their homes is coming down, they don't feel as rich. They don't feel like they want to spend as much. They feel like they need to tighten their budgets, even when in a lot of cases they might not need to, but psychologically, they're making those decisions not to spend more.

Aric: Yeah.

Royal: And that is kind of a self-fulfilling prophecy there that will also slow down the economy as well, that hey, inflation's very high. my home's lost 5 or 10% of its value. The stock market's down 25%. I don't feel as comfortable, I don't feel as safe as making those big ticket item purchases anymore.

Aric: Yeah.

Royal: So that right there is another factor that the Fed's building into this.

Aric: Yep. Absolutely.

Royal: The, the other interesting thing that the, the US government did was this inflation reduction act that they passed earlier this year.

Aric: Mm-hmm.

Royal: And some of this was, I think, pretty debatable on whether or not it will actually help with inflation. But it's nice that they named it the Inflation Reduction Act. Some of it, I think, will be positive, but for instance, they injected $80 billion into the IRS to go after people who are trying to, cheat their taxes as well as really probably modernize the IRS. If you talk to any CPAs right now, the wait time to get a response from the IRS is, is astonishing. It's hard to even do business at this point.

Aric: Wow.

Royal: So that will be interesting to see, see what that's, that's like down the road if, if, if those dollars get spent accurately. The, the good thing I think that we saw happen was, one piece of this was for Medicare, will now be able to negotiate drug prices, in bulk.

Aric: Mm-hmm.

Royal: And that's really going to, number one, I think, help the end consumer as well as save a lot of money for the government to bring down some of those, drug prices there. And they also capped, insulin at $35 per dose, which for those who are diabetic, is a really big deal.

Aric: Yeah, that's huge.

Royal: Now, unfortunately, private insurance are not gonna see any of those benefits. But for, for Medicare, I think those are big deals to talk about and think about there. The other one, and, and this is, this is where I think it's, it's more challenging to say, Okay, what's, what's really in the bill is, almost $400 billion of climate change initiatives, which are probably necessary, but let's not just put money in there and say that's gonna reduce inflation.

Aric: Yeah.

Royal: That's gonna be a long term, project of modernizing our electrical systems to handle all these electric cars we're pushing out into the, uh, the world. So, eventually it'll bring down oil prices, but I think a lot of people are expecting higher oil prices for the coming years because of this changeover.

Aric: Got it. Yeah. I mean, there's a lot, right? There's a lot in there. A lot that you just barely scratch a surface on. but I think bottom line, everybody's asking the same question, Is it actually gonna help?

Royal: Right. Right. And I think it's, it's going to be the Feds being aggressive in sending us into a recession. That's, that's really what the feds are trying to do. I think, right now we, we just had another 75 basis point increase, or three quarters of 1% increase.

Aric: Mm-hmm.  

Royal: A lot of pundits are expecting another one in December to really push short term rates up close to 5%, and that's gonna mean higher mortgage prices, higher interest costs for business. So we're gonna start seeing the results of this happen throughout 2023, and that's, that's why we're really, really preparing our clients for what could be a rough, uh, year next year.  

Aric: Yeah.  

Royal: Not necessarily, more volatility in the stock market, but just we're not gonna see any recoveries anytime soon in the stock market, just from the standpoint of that slowdown and that recession. 

Aric: Mm-hmm.  I mean, if they're gonna continue to do what they need to do to reset this entire thing, if you want to call it that, like you said, it's, it's not like the stock market's gonna say, Well I know in two years it's gonna be fantastic, so we're gonna do better now, , they're gonna wait to see proof in the pudding and, and all that until it can make any type of comeback. So I think that's very smart,  

Royal: Yeah. And I, I think the stock market will react positively once we see that inflation number come down  

Aric: Mm-hmm.  

Royal: And we start to see the Feds back off on the, these interest rate increases. I think the Fed’s doing the right thing, raising interest rates like this. I wish they would've started sooner, but I think they're being pretty aggressive with it, which is a, which is a good thing because we do want to try to get this under control sooner rather than let it drag on for the entire decade.  

Aric: Okay, so what can we do? Right? What can we, as individuals, what do you suggest? 

Royal: Yeah, so the, the thing I'm really talking to folks about right now is most of my clients, who own a home refinanced their home over the past three or four years.  

Aric: Mm-hmm.  

Royal: They haven't a, an interest rate on their mortgage, of uh, probably around 3%.  

Aric: Yeah.  

Royal: Very rarely do I come across somebody with a, a above 4% mortgage anymore. That in and of itself almost becomes an asset.  

Aric: Mm-hmm.  

Royal: Just from the standpoint of you have a fixed rate mortgage. That's locked in, that doesn't go up with inflation. And as inflation increases, it becomes easier and easier to pay. So, for some folks, I'm, I'm having that, that conversation of does it make sense to try to get your mortgage paid off or does it make more sense to maybe reinvest those dollars? Hold onto those because we can get a much higher interest rate on those because the interest rate environment is, is so much better now.  

Aric: Mm-hmm.  

Royal: So, conversations I'm having quite often with folks. I think the challenge for a lot of people is going to be, hey, we refinanced this house. We're at 3%. We can't afford now to move someplace else, because if we're gonna sell this house and go get a mortgage for 7 or 8%, Those numbers don't pencil anymore. So that's gonna be the challenge. We'll probably continue to see a slow down here in people moving and probably moving upstream, to kind of buy that bigger house because, 

Aric: Yeah,  

Royal: That 3% mortgage, that's a powerful thing.  

Aric: That's pretty nice. 

Royal: When mortgage rates have doubled in in a year.  

Aric: Yeah.  

Royal: And, uh, could go even higher. 

Aric: Yeah. All right. What else? What other advice do you have?  

Royal: Yeah. Um, I, I think the, the other thing re return to your budget. Get back there. Go through that. You know, we, we've had some, some nice times in the markets, a lot of free money kind of throwing out there. When the government started sending out checks, you knew it wouldn't last for forever. 

Aric: Mm-hmm.   

Royal: So take a look at your budget. Make sure you know where each dollar is going. You know, good budgeting software like EveryDollar, or even mint.com. Those are great tools to just kinda, kinda get a handle on and retest how your budget looks and where those dollars are actually going.  

Aric: Mm-hmm. 

Royal: You know, you might, you might want to cut out those things that you're just not using. Those subscriptions that creep up in this day and age, uh,  

Aric: Yeah.  

Royal: Are pretty insidious. So, uh, keep a good eye, a good eye on that, those numbers.  

Aric: Yeah. We, we've talked about that before. It's kinda like a leaky boat, right? 

Royal: Mm-hmm.  

Aric: You've got your boat and you got all these little tiny holes that, oh, this subscription $7.99 a month, or this one's $12.99 a month, and before you know it, you got so many little holes in your boat, it's getting pretty wet in there.  

Royal: Right, right.  

Aric: No, that's fantastic. Good idea.  

Royal: So the other thing, when we talk about all these supply chain issues that we've had, the interesting thing that pretty much always happens with the economy is when you have a shortage, is that shortage is addressed and the attempt is, is to create more supply, to address that shortage, usually what we will see is a glut. We will see prices come down on the other side. Businesses are greedy. People are greedy. They wanna make as much of, of what they can at a certain price.  

Aric: Mm-hmm.  

Royal: And they, so they overproduce those. And so we're starting to see that, for instance, in semiconductors where you had a premium there on semiconductors, graphic cards, that sort of thing, which is really one of the most important components that go into computers. 

Aric: Mm-hmm.

Royal: Now we're starting to see an oversupply of those components and so we might see some price drops there, so just something to keep in mind there as you're shopping around. Same thing for used vehicles, we saw such an amazing premium used vehicles. We will probably start to see that premium disappear. We've already seen some cracks there.  

Aric: Mm-hmm. 

Royal: So, just kind of be aware of that, that things are going to be changing in price because of, these shortages that now turn into gluts. The other thing I'm talking to folks about quite a bit though, is taking advantage of what we have here in the US, which is a very strong currency. We, right, right now the, the Dollar is, very strong globally. So, this is a great time, in my opinion, to start looking at, hey, I, I might want to go to Europe. I might want to go to Japan. Take advantage of that higher dollar, that stronger dollar, and start looking for those travel opportunities there. Especially with, Europe going into recession here next year, they're gonna have a very hard time of it. We don't want to take advantage of that or of them, but you know, it could be a very affordable time.  

Aric: That's putting money into their budget, right?  

Royal: Yeah.  

Aric: We're doing them a favor, Royal. Yes, exactly. 

Royal: Exactly. and then the other thing is, is, if you're sitting on a lot of cash right now, that is being affected by inflation and with interest rates so much higher, we're seeing CD rates, up around 4%. 5% in some cases. There's a lot of good opportunities here to, get a much better yield on your money than just having it set at your local bank. 

Aric: Mm-hmm.  

Royal: you know, so we're really encouraging people if, if you have well beyond what, what you need for an emergency fund in your daily cash-flow to start looking at some of those opportunities. And then finally, think about the future, we're, we're going to have a recession. Things are going to get hard. But what that means is, is we are going to have higher interest rates because the Feds still don't see inflation coming down. But at some point down the road, they are gonna start lowering those interest rates, hopefully back to, that more normal period that we were at before Covid.  

Aric: Mm-hmm. 

Royal: So, so just, just be aware of that these things don't last forever, but it can go on longer than you'd like. We might see those, those interest rates here for a, a while now. So definitely be looking at what you can do to take advantage of that. Maybe locking in a longer CD.  

Aric: Mm-hmm. 

Royal: Uh, maybe locking in a, a higher yielding investment here for a while. With the anticipation that down the road, these interest rates will come back to the ground.  

Aric: All right. A lot of great information. anything else we need to cover today?  

Royal: I think that was it. I think that was, kind of a, a good overview there for, for folks who are kinda wondering, you know, what's going on and, and how they should be looking to address things. 

Aric: Well, as you've said in many podcasts, Royal, this is everything you do, everything you talk about, everything that you work with your clients on, everything's individual, right?  

Royal: That's right.  

Aric: It's not something that, this is a blanket statement. This is not something that's like, Hey, take all the advice that you hear in this podcast because it may not fit you and with that in mind, anybody that's interested in what you're doing, interested in the things that you've said today should reach out and how do they get ahold of you? What's the best way to have this conversation and say, here, here's my particular situation. The things that you said sound great, but what will work best for me? 

Royal: Yeah. You can visit our website at opfa.com. Schedule an appointment right there, or call our office at (541) 772-1116.  

Aric: All right, Royal, always a pleasure. Thank you, sir, for your time. My.  

Royal: You bet. 

Aric: And our last thank you always goes to you, our listening audience. Thank you so much for tuning in and listening to Life by Design podcast with Royal Standley. If you have not subscribed to the podcast yet, please click the subscribe now button below. This way, when Royal comes out with a new podcast, it'll show up directly on your listing device, and it makes it much easier to share these podcasts with friends and family. We would humbly ask that you like this podcast, rate it, and leave review as this also helps others find the show. 

Again, thank you so much for listening today. For everyone at Oregon Pacific Financial Advisors, this is Aric Johnson reminding you to live your best. Every day and we'll see you next time.  

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Please note that discussions in these shows are for educational purposes only. Information presented should not be considered specific investment advice or a recommendation to take any particular course of action. Always consult with a financial professional regarding your personal situation before making financial decisions. The views and opinions expressed are based on current economic and market conditions and are subject to change. All investing involves risk, including the potential for loss of principal. Securities offered through United Planners Financial Services (UP), Member FINRA/SIPC. Advisory Services offered through Oregon Pacific Financial Advisors, Inc. (OPFA). OPFA & UP are independent companies. Neither OPFA nor UP offer tax or legal advice.