Only Rip Van Winkle could escape the pain of overpaying for a piece of furniture and waiting ten months for delivery or filling up the gas tank of a large SUV. The term “sticker shock” takes on new meaning as car dealers now charge thousands over sticker price rather than offering potential customers incentives to buy. Jerome Powell of the Federal Reserve and Janet Yellen of the Treasury described the rapid inflation of 2021 as “transitory” or temporary. Unless you have just awoken from an extended nap, you know that inflation has not only persisted but also permeated nearly every corner of the global economy.
In the years between the Great Recession and the pandemic, deflation, or falling prices, rather than inflation, concerned the Federal Reserve. The theory says that if prices continuously fall, consumers will hold off on spending in hopes of buying things for lower prices in the future, causing retailers and producers to slash prices further, creating a vicious cycle of falling prices and declining economic activity. To make matters worse, the Fed’s aggressive response to the 2008 Financial Crisis of cutting rates close to 0% meant that the Fed no longer carried that arrow of cutting rates to fight deflation in the quiver. Structural economic factors such as increasing globalization, China’s endless supply of cheap labor, rapid technological improvements, and razor-sharp efficiency of big box retailers like Walmart all kept a lid on prices despite the Fed’s Zero Interest Rate Policy (ZIRP).
Fast forward to 2022, and things look very different. Not only has China developed large middle, upper, and billionaire classes and reduced the supply of cheap labor, but it continues to lock down its economy like it’s March of 2020 in an attempt to eliminate COVID-19 infections. Then, Russia invaded Ukraine, disrupting Ukraine’s exports, and the rest of the world rightfully imposed sanctions on Russia, driving up the price of wheat and oil, respectively. The Fed cannot control these supply-side shocks but can only blunt demand by raising interest rates and potentially throwing the economy into recession.
Is cash king when faced with higher rates, tighter monetary policy, and a looming recession? Not when it loses purchasing power at eight-plus percent per year! If you haven’t already, try researching Series I Bonds from treasurydirect.gov. Speak with a financial advisor before purchasing because you cannot take your money out for the first twelve months, there is a three-month interest penalty for redeeming between years one and five, and there is a $10,000 per calendar year per person purchase limit. They are guaranteed by the US Treasury and pay 9.62% for the first six months if purchased before November 2022. After that, the interest rate adjusts for inflation. Don’t sleep on this chance to protect your purchasing power!