Rising Prices Are Here For A While

Aug 30, 2021 | Economy, Financial Planning, Investing, Retirement

The Federal Reserve is toying with the idea of reducing their asset purchases known as Quantitative Easing. Part of the reason is due to the economic rebound and increasing inflation. But, as Karl Eggerss explains, even if they do this, rising prices are here for a while.

Trey Ware:

And speaking of the Federal Reserve, the Chairman Jerome Powell gave his speech at Jackson Hole last week, saying the US economy has made enough progress for the Central Bank to possibly began tapering off their asset purchases this year. But get ready because rate hikes are coming. Karl Eggerss from creatingricherlives.com joins me on Monday at this time. How did you interpret what Mr. Powell was saying? And how did the market interpret that, Karl?

Karl Eggerss:

Yeah, it’s not a big surprise, Trey. I mean, they’ve been telegraphing this for a few months and remember there’s a big group of Fed officials. Some of them have the voting rights. Some of them do not, but some of them have been out there saying it’s time. It’s time that the economy’s recovered enough, that we need to take our foot off the accelerator to stop some of these asset purchases. They’re buying bonds to essentially keep interest rates down and help the economy.

Karl Eggerss:

I want to be very clear though, and the listeners need to understand what this means. This is not the same as raising interest rates. Raising interest rates, where they literally go and say, we’re going to adjust interest rates up. That may not happen for a whole other year, maybe even a year and a half. So that’s on the back burner. What they’re talking about is ending their quantitative easing and all they’re talking about is reducing their purchases. They’re not talking about shrinking the Fed’s balance sheet. That’s quantitative tightening. That is a different animal.

Karl Eggerss:

This is like, any one of a baseball game. This is the very first thing that they’re going to do. And so they’re probably going to start doing that at the end of the year. And so the implications are maybe nothing, but it could be that interest rates start to just naturally go up on their own a little bit. Long-term rates, so when you talk about refinancing a home and things like that.

Karl Eggerss:

But I will tell you, our estimate is that interest rates are still going to be pretty low for a long time in this range. But what we are dealing with, and you and I have talked about it, is inflation. It’s still going to be here for a while. I mean these high prices and things costing more than you’re used to, that’s not going to change because the supply chain is still messed up. Delta has thrown a wrench into that even further, and so that’s going to go on.

Karl Eggerss:

Also, it’s not quite what they used to call stagflation where the economy slows a bit and there’s inflation, but it’s a little bit, it’s a cousin of that. So we’re going to see prices continuing to go up and the economy is starting to slow a little bit. I mean, these crazy bounce off what we saw a year and a half ago has to slow down a little bit. So we’re seeing a little bit of a slowing in the economy at the same time inflation is still high.

Karl Eggerss:

And one other thing, sometime this week, or believe me next week, we’re going to have maybe seven and a half to 10 million people that are going to stop getting some of the pandemic aid that they’d been getting the last year and a half. So you could see a lot more people jump into the workforce in the next few weeks here. So we need to watch that as well. Maybe, just maybe, we go to restaurants and we don’t have to wait two hours because there’s not enough staff.

Trey Ware:

Well, only pay $75 for a meal with four people there, a family of four having lunch, paying $75 these days. The prices have gone just insane because of that supply issue. In fact, Sysco announced last week, the largest food distributor to grocery stores, that they’re having interruptions now. Because number one, they don’t have drivers, and number two there’s production issues as well. And any interruptions like that only drives the prices up higher.

Karl Eggerss:

Well, and don’t forget. I mean, it’s not just bottlenecks. The issue was when people stopped going to movies and restaurants a year and a half ago, they didn’t stop spending. What happened was all this government aid came in, and so they just redistributed their spending. They instead spent on things like luxury goods and improving their homes and continue to buy things on Amazon. So the spending continued. And so when you had the production drop, like you said, when they literally couldn’t make it fast enough, and then the economy came back faster than people thought. That’s what the problem was. So we had demand going up at the same time supply was going down in goods and services.

Karl Eggerss:

And don’t forget too, that the government aid was a huge part of what kept this economy going. I mean, you can argue that it wasn’t as necessary. You can argue they should have ended it earlier. You could argue the wrong people were getting it. But we had a ton of aid, not only went to individuals, it went to businesses through the PPP loans. And so you’re seeing all of that. There’s just too much money out there chasing too few goods. And that’s what inflation is. I mean, look, if you’re a hunter going to buy corn for your feeder, it used to be $7 a bag, 50 pound bag, like maybe, three, six months ago. It’s $10 a bag now.

Trey Ware:

Oh, I know. I know.

Karl Eggerss:

People can’t afford it.

Trey Ware:

People are eating and they’re realizing how expensive food is these days. Karl Eggerss, creatingricherlives.com. Thank you, Karl.

Trey Ware:

Ware and Rima up next. KTSA.

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