Consumer prices and wages are on the rise and that means one thing: Inflation.
It's not only a hot topic and showing up in more news reports, but it's also catching people off guard and has the potential to create some real pain for those near or already in retirement.
Here's how:
As a quick primer, inflation is defined by Investopedia as, "A sustained increase in the general level of prices for goods and services in a county, and is measured as an annual percentage change. Under conditions of inflation, the prices of things rise over time. Put differently, as inflation rises, every dollar you own buys a smaller percentage of a good or service. When prices rise, and alternatively when the value of money falls you have inflation."
It's a concept most people understand, yet the problem is everyone got comfortable without it.
For years, the Federal Reserve has made inflation almost non-existent by keeping interest rates low, and frankly, that worked well for a lot of people.
But now that their policy has changed, and major tax reform is fueling growth, the game is very different.
While the government likes to avoid food and energy in it's core calculation, this is where it hits consumers hardest.
I recently went into a fast food restaurant with my kids to grab a quick bite. We ordered, and then when we sat down I decided to look over the receipt.
As I reviewed it, I noticed they charged me the combo price for the burgers I got my kids. So, I asked the cashier to make the adjustment and I was horrified when he said, "No those are the new prices."
Same thing at the gas pump.
Gas is back near $3.00 a gallon here in Michigan and I have heard friends complaining about the price increase of $0.35 cents a gallon is less than a week.
Rising prices can really hurt retirees as many are on fixed income and have budgets pegged to the old costs and way of life, not the new ones.
With rising interest rates, come rising borrowing costs. Recent reports I found online suggest that the average 30-year fixed-rate is about 4.58%.
A rapid increase from the 4.15% available earlier this year on January 1st, and significantly higher than the record low of 3.5% back in December 2012.
You're seeing the same thing with auto rates. Last month, interest rates on new-car loans stood at 5.7%, up from 4.4% in March 2013. On the surface, these rates may not be seen as harmful for retirees who already have their home and car paid off, however, but it may make it harder for them to sell them, particularly their home as younger buyers grapple to finance them.
Rising yields on the 10-year U.S. Treasury can also spell trouble for retirees.
Recently the bench mark index hit 3%, which is roughly double from the lows around 1.5% in 2016.
The issue with a 3% 10-year Treasury is that many investors will opt for the safety of it, rather than the risks associated with the stock market.
In the recent past, the yield on the 10-year was so low, it made more sense for investors to be in the stock market, which provided a higher yield along with the option for growth.
However, right now the S&P 500 index is yielding less than 2% and some feel near a peak.
Leaving some investors willing to take their gains and move to a safer bet with a higher yield.
While inflation can be domino effect that strikes retirees in multiple ways, it can also hit the economy. When the cost of borrowing increases, it can depress economic activity, and with higher wage growth, companies must deal with rising labor costs.
Factors that can impact a corporate sales and profits.
While the story around inflation can sound ugly, one benefit is that over time, savers who prefer CD's should also see higher rates as well.
However, banks are notorious for moving slow on higher savings rates, so you may need to look to other options like Treasury Inflation Protected Securities until they do.
