Economic News

Many investors want to know if there are good reasons now to be worried about inflation. Inflation, which is the trend of prices over time to rise, hasn’t reared its ugly head too much so far in the 21st century. In fact, during the coronavirus pandemic, some sectors experienced deflation instead.

However, some Americans still recall the 1970s, with runaway inflation but without a strong economy (stagflation). Inflation has been less of an issue since Congress added monitoring inflation as part of the Federal Reserve’s mission, in addition to “full” employment.
But as you know, past performance is no guarantee of future results!

Why some economists are worried about inflation

To help Americans return to work after the pandemic and keep small businesses afloat, the current administration passed a stimulus bill. Some, though not all, economists are worried that the effects of the stimulus, plus the expected higher performance of the economy in the near future, in addition to continued “loose” monetary policy designed to encourage demand, could cause prices to soar.

You might recall that inflation is often described as “too many dollars chasing too few goods.” The stimulus plus loose money provides more dollars. Yet it remains to be seen whether there will be too few goods.

Rising prices are one thing and not necessarily a problem in and of themselves. The issue is when paychecks don’t grow along with inflation. When consumer grocery bills are more expensive, but their wages have stayed the same, inflation creates a problem that’s both financial and political.

It may be worth noting that in inflation-adjusted terms, workers have about the same purchasing power on average as they did forty years ago, even though productivity has risen. What wage gains we’ve seen are mostly to employees in the top wage tier, according to Pew Research. If wages don’t match inflation, workers will be relatively poorer than they were in the 1970s.

In addition, bond yields have gone up recently, which is often a sign that investors expect inflation. This attitude is often a self-fulfilling prophecy: because investors are concerned about it, inflation starts to rise.

Inflation isn’t as simple as it may seem

You’re probably familiar with the term permabear, a person constantly prophesying stock market drops and economic recessions. Similarly, there’s a group of economists who frequently warn of impending inflation, who perhaps should be referred to as permainflators.

Inflation is commonly presumed to increase as employment increases, which is how it worked in the 20th century. However, the US hasn’t experienced inflation during the past few unemployment events, including the Great Recession and the coronavirus pandemic.

Although people generally understand what is meant by inflation, measuring it is a bit trickier. Most models use a “basket” of consumables and calculate the price changes on the basket on an ongoing basis.

One of the more well-known measures is the CPI or Consumer Price Index. It has some quirks, including out-of-pocket medical expenses, but no changes in what Medicare is charged (which would increase the bills for seniors on the plan).

Another issue lies with the quality measurement. When telephone providers began offering unlimited data services, CPI dropped due to the assumption that people would get more for their money. But very few people actually saw their phone bills decrease.

The Fed measures things differently by viewing what businesses are selling through the Personal Consumption Expenditure (PCE) index. This calculation captures behavior changes due to price shifts. For example, it will reflect more people buying oranges when apple prices go up. It also takes Medicare into account when looking at health care expenses.

Core inflation is the term used when food and energy are removed from the baskets. Their prices fluctuate with the weather, oil supply, and other factors that aren’t relevant to inflation.
It’s not at all clear why inflation has remained so low this century, even with fluctuations in employment that would typically increase and decrease it. Also, although inflation, in general, remains low, some sectors such as healthcare and housing have experienced significant increases. Before the pandemic, inflation in services was generally higher than inflation for goods.

If inflation has such adverse effects, why are people worried about its opposite, deflation?

Not all inflation is bad. As in medicine, it’s the dose that makes the poison. Note that the Fed’s target is 2% inflation, not zero.

Out-of-control inflation, when wages can’t keep up with rising prices, is problematic. Consumers can’t afford to consume, which means more firms go out of business, employing fewer workers.

On the other hand, a modest amount is an indicator of a good economy. It’s great for homeowners with fixed-rate mortgages, for example. Higher inflation brings with it higher interest rates, which also gives the Fed room to cut rates in a recession.

Decreasing prices may sound good at first, but they’re a signal of a weak economy. Deflation means that debts get more expensive, and that’s bad for nations with a lot of debt. It’s also bad for economies that have workers with a lot of debt too. The US doesn’t need deflation right now.

But what if we turn into Argentina? Or Venezuela? Or the US in the 1970s?

Argentina is a country with hyperinflation run amok. Restaurants write their menu prices on stickers to update as their supply of food becomes more expensive. There’s no point in saving in Argentinian pesos. Hyperinflation is a key driver for many Argentinians to enter the cryptocurrency market, to varying degrees of success. Other victims of runaway inflation include Venezuela today and the US fifty years ago.

Can it happen here, to the US in the 21st century? Technically, yes, it’s possible. However, it’s unlikely. The financial system has changed quite a bit since the 1970s. None of the three countries above had a strong central bank (the Fed) dedicated to managing inflation the way it does today, for one thing.

Long story short for worries about inflation?

There are both short-term and long-term dynamics in play right now. The pandemic is short-term, and no one knows what will happen when we slowly resume normal activities.

Treasury Secretary Janet Yellen, previously the Federal Reserve chair, has said that employees out of the workforce are a much more significant threat than inflation. That’s why she agrees with spending money on the stimulus.

If inflation starts heating up, today’s Fed has ways to cool it down. Including raising interest rates. Savers would be happy with higher rates since they’d earn more than they currently do.
We can’t say inflation is gone for good. Or that no one needs to worry about inflation at all. But at the same time, it’s unlikely that the US will suddenly be in an Argentina-like situation. Right now, focusing on getting people back to work after the pandemic is a higher priority.

Would you like to discuss how your portfolio will hedge against inflation in the long term? Feel free to give us a call at (619)255-9554 or send us an email to set up an appointment.

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Would you like to discuss how your portfolio will hedge against inflation in the long term? Feel free to give us a call at (619)255-9554 or send us an email to set up an appointment.

There’s a lot to unpack in the newly-passed, newly-signed American Rescue Plan bill. The goal is to help relieve the economic suffering caused by the COVID pandemic in various sectors. The bill makes unemployment benefits more generous, health insurance more affordable, and having children less expensive. It also reduces the pandemic’s most damaging effects on low-income homeowners and the homeless, people with student loans, state and local governments, and school systems.  

Most of the press coverage has focused on the $1,400 checks. Not everybody is receiving them. Only single people with an adjusted gross income of $75,000 or below (households with $150,000 AGI or below) qualify for the full amount. The amount phases out entirely for people with incomes above $80,000 (households with AGIs above $160,000). The reporting period is the most recent year that people filed taxes; it could be 2019 or 2020.

Unemployment and Cobra

The American Rescue Plan also extends unemployment benefits (either through the Pandemic Unemployment Assistance program or the Pandemic Emergency Unemployment Compensation program) for an additional 25 weeks until September 6. It maintains the $300 per week supplemental benefit. It also makes the first $10,200 of those benefits tax-free for people who report less than $150,000 in income. The extra $300 federal supplement doesn’t count when calculating Medicaid eligibility and the Children’s Health Insurance Program.

The healthcare provisions will be a lifesaver for some ex-employees. Under the government provisions in COBRA, people who lost their jobs can continue buying health insurance through their former employer. Still, they pay full-price rather than the subsidized price companies offer to their workers. The new relief bill would have the government pay the entire COBRA premium from April 1 through September 30.

The bill will make health insurance much cheaper for those laid off than those who are still working. (This generous subsidy is not available for persons who left their job voluntarily.) Finally, the law imposes a cost cap on health insurance policies purchased through a government exchange. The premiums should not exceed 8.5% of a person’s adjusted gross income, which will benefit low-wage workers.

How the American Rescue Plan helps families

Families with children will receive additional benefits—but only families whose income qualifies them for the $1,400 checks. 

The bill raises the child tax credit from $2,000 to $3,000 ($3,600 for children ages five and under), and it increases the age limit for qualifying children to 17, from 16 previously. These amounts could apply as a tax refund even for people whose tax bill is zero; that is, those who don’t have any reportable income to offset. 

Families with incomes between $150,000 and $170,000 would receive the same $2,000 tax benefit as before, and that benefit phases out for married filers with incomes over $400,000 (singles above $200,000).

A bigger set-aside for families with children is a monthly child allowance. The government will send a monthly check of $300 for each child under six years old and $250 for each child between the ages of six and 17.

The American Rescue Plan sets aside $27 billion for financial assistance to people whose household income does not exceed 80% of the area’s median income to offset rent, utilities, and other housing expenses. 

The Rescue Plan sets aside $10 billion to help homeowners struggling to make mortgage payments and $5 billion to help the homeless.

Finally, if the Biden Administration decides to cancel student loan debt (which is not a given), the Act specifies that the borrowers wouldn’t have to pay any income taxes on the forgiven debt. 

You can see from the chart, with figures compiled by the nonpartisan Congressional Budget Office, that there is also money set aside to keep restaurants and bars afloat and money to help schools better control the risk of infection so they can reopen. $350 billion is going to state and local governments to prevent layoffs and allow them to continue providing essential services

The administration passed the American Rescue Plan as a stimulus measure, but we can better characterize it as disaster relief. A graph prepared by the Congressional Budget Office (shown here) clarifies that the U.S. economy was on a path to never quite recover from the COVID recession before this legislation passed. 

With the American Rescue Plan in place, the best estimate is that the economy might fully recover as early as the 4th quarter of this year.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

The U.S. Congress recently passed, and the President signed, the 5,593-page Consolidated Appropriations Act of 2021 relief package—and experts are still mulling over what the impact will be on ordinary citizens. There are stimulus checks, tax planning relief provisions, and a break for people who experience high medical expenses during the pandemic.

There’s even a new paycheck protection program extension.

New AGI and tax considerations in latest relief package

First, the new legislation provides for stimulus checks, with a “base” credit of $600 per eligible individual plus $600 more for any dependent child (technically, any children qualifying for a Child Tax Credit). But, as with the CARES Act, eligibility starts phasing out for individuals earning more than $75,000 of adjusted gross income or joint filers with over $150,000 AGI.

These phaseouts, based on the 2019 tax return, seem unfair. The economic hardships the bill was designed to address took place in the final three quarters of 2020. But if the taxpayer’s 2020 income calculation indicates a larger check amount, the government will issue an additional check to make up the difference. If someone receives a stimulus check based on 2019 income and then reports higher 2020 income, that would make that person ineligible to receive the check. There will be no requirement to pay the money back to the government.

The new legislation also extends regular unemployment compensation benefits for an additional 11 weeks and adds $300 a week to the unemployment checks. This “pandemic unemployment assistance” for individuals who wouldn’t usually qualify for unemployment benefits (such as self-employed persons) was also extended for 11 more weeks. Note that the $300 a week and 11 weeks is lower than the $600 a week and four-month extension passed in the CARES Act.

Medical and charity deductions in the new relief package

On the tax front, the hurdle for deducting medical expenses in any given year was reduced from 10% to 7.5%, meaning that anything over that percentage of adjusted gross income would now be deductible on your next tax return. And the bill extends a provision from the CARES Act relating to charitable deductions.

People can take a full deduction of up to 100% of their AGI for any cash donation to a public or private charity (but not a donor-advised fund).

In the bill, Congress did not extend the temporary waiver of required minimum distributions, which means that people over age 72 will have to resume taking their RMDs in 2021.

What else can we find in those 5,593 pages?

Taxpayers will use their 2019 earned income to determine eligibility for the 2020 earned income tax credit and additional child tax credit.

Business lunches and dinners have become 100% deductible for 2021 and 2022.
And the bill creates a second round of the Paycheck Protection Program forgivable loans, with $284 billion set aside.

Finally, the bill provides funding for the federal government’s operations for another nine months.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.