High inflation might be here to stay savers need to embrace for impact.  During a virtual conference yesterday, Federal Reserve Chairman Jerome Powell said, “supply-side constraints might last well into 2022.”

Higher inflation will eat into disposable income and savings since consumers will have to allocate a higher percentage of their income for consumer goods. Every dollar they save today will be worthless tomorrow.

 The Core prices are up 3.6 percent in August from a year earlier, but the Consumer Price Index (CPI) for all urban consumers rose 5.3% for the 12 months ending August 2021.

The average savings account interest rate is about four basis points or 0.0004%. The interest rate on the 10-year Treasury note is at 1.636%

Double Whammy for Savers

Low interest rates on savings accounts and high inflation put savers and risk-averse investors in a bind. Money market and other fixed-income accounts are all yielding extremely low-interest income. 

A saver who put $100 in her savings account today will have $100.04 ($100 x 1.0004) in one year.  If the CPI remains stable at 5.3% over the next 12 months, her purchasing power will be $94.74 ($100.04 – ($100 x 5.3%)

Too Much Federal Spending or Labor and Supply Shortages?

In response to the Covid-19 pandemic, the government approved $3.9 trillion in obligations and promises of payments with more than $3.4 trillion have already spent. 

Federal spending combined with the Federal Reserve’s stimulus program put a lot of money into the economy. 

Through its quantitative easing (QE) also known as tapering, The central bank has been putting a lot of money into the economy by buying financial assets.  

The Fed chairman said they would look into cutting those purchases during their November 2-3 meeting.

As a result of the pandemic and the subsequent government shutdowns that followed, the economy is facing severe labor and supply shortages which might explain why the Fed thinks that the high inflation is temporary.

The Fed Benchmark rate, which dictates the interest rates you pay on mortgage, cars, and other things, has been stuck to zero since the 2007-08 financial crisis response.

Savers might want to tighten their seatbelts because high inflation might be here to stay.  Serial entrepreneur Jack Dorsey, Twitter & Square co-founder, believes that it is so, and hyperinflation (very high and accelerated inflation) might also be a permanent part of the economy.   

Conclusion

The bottom line is savers and low-risk-tolerant investors might need to factor high inflation long-term into their financial planning. 

However, Labor and Supply Shortages provide a concrete argument for those who believe that high inflation is a temporary thing, including the Federal Reserve.  

Tapering, raising rates, and fixing the labor and supply shortages can help the Fed achieves its 2% inflation goal by the end of 2022.