After a second year in which the word "unprecedented" did more than its fair share of narrative heavy lifting, economists are pretty hopeful about 2022. Sharply rising prices and the uncertain severity of the Omicron variant of the coronavirus cast twin shadows over forecasters' expectations, but some found a reason for optimism despite such unknowns.
The issue of inflation is critical because it affects so many aspects of the economy, including Federal Reserve policy and borrowers' interest rates, as well as prices for products and services purchased by consumers and businesses.
One positive light is the high rates of accumulated savings that many American households still have. Although bank data shows that such reserves are diminishing, some analysts believe they will be able to withstand rising inflationary pressures for some time.
For much of the last quarter of 2021, markets had been pricing in three interest rate rises in 2022, which was mirrored in the economic estimates given by members of the Fed's policy-making committee in December. The major question is whether that's the correct level of tightening for an economy that's been everything but predictable over the past 22 months, NBC News reported.
Average Americans to pay more for household products than the wealthy
Inflation in the United States increased by 6.8% in 2021, the most significant increase since 1982, considerably above-inflation increases of 1.4 percent in 2020 and 2.3 percent in 2019. The ensuing rises in consumer prices have exacerbated the economic disparity between the rich and middle classes in the United States.
According to a survey released on December 15 by the University of Pennsylvania's Wharton School's Budget Model project, average Americans are now spending 7% more on home goods, while wealthy Americans are spending 6% more.
Researchers attribute the disproportionate increases in household product spending to the differing manner in which average and wealthy Americans balance their budgets. For example, in 2020, those in the 95th percentile and above for income spent 4 percent on energy commodities while those in the zero to 60 percentiles spent 7 percent of their budgets.
Per Newsweek, inflation is a stumbling block for President Joe Biden's Build Back Better social safety and climate spending measure, which has the support of moderate Democratic Senator Joe Manchin. While advocates of the plan say that it will relieve poverty in the United States, Manchin has remained certain that it will raise inflation and damage ordinary Americans.
How to manage your personal finances in 2022?
Inflation is expected to continue beyond 2022, according to several analysts. While it is impossible to prevent inflation from rising or falling, making the correct choices and financial decisions can assist in mitigating its effects. Here are seven suggestions for keeping your money safe against inflation, as per Vision Times:
1. Adhere to a budget
Make a budget that includes the sorts of costs that are likely to be affected by inflation, such as food, healthcare, utilities, education, and transportation. Learn how to stretch your budget by shopping at less-priced places such as Trader Joe's and Costco.
2. Invest in commodities and real estate
Investing in commodities such as oil, precious metals, wheat, maize, and natural gas is another approach to combat inflation. As inflation drives up prices, commodity prices will climb in tandem, providing investors with high profits. Commodities can be purchased as exchange-traded funds (ETFs), futures contracts, or options.
Real estate investors will benefit in the long run as well. Real estate is the perfect hard asset for gaining the most value during periods of rising inflation. Greater housing prices frequently lead to higher rent, favoring investors who make money from rental homes.
3. Avoid holding long-term fixed-income investments
During periods of rising inflation, putting money into long-term assets that provide a fixed rate of return might be the worst investment option. Bonds and certificates of deposit are examples of fixed-income products (CD). The problem with these investments is that when interest rates rise, the value of the underlying securities decreases.
4. Treasury inflation-protected securities
TIPS is a form of bond issued by the United States government. Treasury and is intended to give inflation protection. Holders of these bonds will not lose buying power when the price of these bonds rises in line with inflation. TIPS pays interest twice a year, and the value is modified annually depending on the Consumer Price Index (CPI).
At the time of maturity, the bond's original amount is guaranteed by the US government. The inflation adjustments made to the bond's principal amount are taxable. To avoid "phantom income," it's best to keep them in a retirement account (income that investors have to pay tax on despite not having received any cash).
5. Review your mortgage, debts
Homeowners who took up a mortgage before the COVID-19 outbreak might think about refinancing while interest rates are still low. When prices rise, it's a good idea to pay off debts or make them less expensive.
6. Consider investing in stocks
Investing in stocks has long been one of the most effective strategies to combat inflation. This is due to the fact that stocks have a great track record of success. For more than 90 years, equity returns have outperformed inflation. However, while investing, one should concentrate on equities that have a history of outperforming inflation. Energy, healthcare, construction materials, food, and technology are among them.
7. Become energy efficient
Energy prices are one of the key sources of inflation. Using energy-saving light bulbs, installing solar panels, purchasing a fuel-efficient automobile, and investing in other energy-saving initiatives might all assist.
