What local finance experts think about inflation and our topsy-turvy economy

Inflation in Kansas City

After a topsy-turvy two years, gas prices are finally falling and unemployment is down. But a cloud still hangs over the American economy as inflation hits historic highs in the United States, leaving consumers and businesses to navigate uncharted financial waters.

“The U.S. economy hasn’t dealt with sustained inflation since the early 1980s,” says Erik Olsen, chair of the UMKC Department of Economics. “When I was an undergrad, it was in our memory. It’s become less important because we’ve had thirty-five years of sustained price growth and low rates of inflation.”

While some point to the 2021 American Rescue Act as a significant cause of inflation, it’s a global issue driven by supply chain disruptions and changing consumer habits. Inflation is now at a record high in the U.S., though the country still ranks somewhere in the middle among global economies, according to Forbes, which found that the U.S. inflation rate placed twentieth out of forty-four advanced economies.

“Panic buying has become a normal part of our experience,” Olsen says, and it can contribute to price hikes. But Kansas City residents’ dollars go further than others. CNBC’s Top States for Business Study ranked Missouri and Kansas among the cheapest states to live, scoring Kansas second and Missouri sixth.

For people without inflation-adjusted income, including retirees, investing isn’t easy. “Employees expect regular pay raises to combat inflation,” says Jon McGraw, the president of the Buttonwood Financial Group. Austin Kuehl, a financial advisor with BMG Advisors, has seen a “fifty-fifty” split between clients investing less and more: “Some people see this as an opportunity to buy investments at a lower price and want to put cash to work rather than watch inflation eat away at it.”

Decades of low interest rates have been a boon for borrowers, notably fueling an exploding housing market during the pandemic. They also led investors to “flock toward stocks to get a better rate of return,” Kuehl says. Though as the Federal Reserve raises interest rates, bonds could potentially “provide better income to retirees than they have in some time.”

Rising rates also mean new opportunities to earn “legitimate, non-negligible amounts of money on savings,” Olsen says. While it’s unclear how long higher interest rates will stay in place, saving can be simple and low-risk. 

Feeling panicked? “There’s an old saying in finance that I like,” Kuehl says. “It’s sometimes attributed to Warren Buffet: ‘Don’t do something, just stand there.’ It’s meant as advice during a time of market volatility.” It can be difficult advice to follow, though, Kuehl says, because it’s now how most people are wired. 

“If you bought a stock at $30 and thought it was a good investment, and the price declines to $15, the rational response is to buy more of it, assuming your initial estimate of the growth potential was valid,” Kuehl says. “But most people have an urge to buy high and sell low.”

Often, the easiest way to make money is, of course, to have money. Funding inflation-linked investments like I-Bonds are a good option, Kuehl says. But consistent, good habits are key. One advantage younger people have is time, McGraw says, “and thus the amazing power of compound interest.”

Will inflation lead to a recession? A “blowout jobs report” released by the Bureau of Labor Statistics in early August suggests it won’t. CNN Business reported unemployment is at three and a half percent—matching the same “half-century low” from February 2020. The Inflation Reduction Act, passed by Democrats, also hopes to curb inflation by reducing the deficit, but recession rumors could change consumer habits in the coming months anyway.

“There’s no difference between economic conditions whether it’s labeled [a recession] or not,” Olsen says. “It’s really just psychological.”

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