How sky-high inflation is evaporating Americans’ savings, imposing ‘cruelest tax’ on the poor

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Historic efforts to tackle inflation have resulted in further pain as well.

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The sneaky bite of inflation has taken many Americans by surprise as rising prices decimated their savings and major sticker shock at supermarkets, gas pumps and everywhere they look.

Rapidly rising prices have become a major new source of concern for American households. 3 in 10 Americans said that daily bills (15%) or inflation in particular (14%) were the biggest concerns facing their families, according to one Monmouth University Survey Released last month. That’s almost double the 16% of Americans who named rising prices or household bills as their biggest concern last July, and more than triple the 8% who named household bills as their top concern in August 2020. has been nominated.

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Government data indicated consumer prices jumped last month at their fastest pace since 1982 – the end of a sore period in the US economy when out-of-control inflation forced policymakers to make a sharp correction resulting in recession and double-digit unemployment rates.

Many who remember this painful historical era are now retiring, and research shows that people’s expectations about inflation are shaped mostly by their experience. This results in “substantial disagreement between young and old individuals in a period of highly volatile inflation,” economists from the University of California, Berkeley and the University of Chicago wrote in a 2014 paper. It also suggests that most consumers are now unsure how to navigate inflation or have little knowledge of its broader dangers.

Here’s how experts say inflation is draining Americans’ cash and how they can prepare themselves for what’s ahead as policymakers look to anchor rising prices.

Savings are eroding because those who have no cushion are crushed by the so-called ‘brutal tax’

inflation, defined by the Federal Reserve The increase in the overall prices of goods and services over time means that Americans have to pay more for their essentials and other expenses than they used to.

While rising price tags may be a more obvious bite, rising inflation can also affect the value of savings accounts for those able to spend a rainy day or exercise financial prudence in building retirement funds.

Many Americans were able to save during the pandemic due to financial aid and the fact that COVID-19 Closed businesses and urged people to stay at home rather than spend on services they used to go out for, according to Sarah House, senior economist at Wells Fargo.

“But that financial cushion is being eroded away more quickly. Given these high rates of inflation, savings are not going that far,” House told ABC News.

Chester Spat, a professor of finance at Carnegie Mellon University and former chief economist and director of the SEC’s Office of Economic Analysis, said rising inflation suggests that Americans’ “spending power is, potentially, going to be significantly reduced.”

If inflation is rising at a 7% clip, and your savings account offers interest rates of some 0.5% (or even a high-yield 1% rate), that’s “spending power.” could fall by about 6%,” Spat told ABC News.

This means that for those saving $1,000, their financial buffer could actually be closer to $940 as inflation eats away at that money at its current pace. For those who have saved $10,000, they can expect about $600 to evaporate from that nest egg—without even touching it.

For Americans who are living paycheck to paycheck, the effects of inflation could be even more devastating. Federal Reserve Chairman Jerome Powell warned MPs on Tuesday That high inflation takes a toll “especially for those who are not able to meet the high costs of essentials such as food, housing and transportation.”

“People sometimes talk about inflation as the ‘brutalest tax’ that really hurts poor people disproportionately, and I can see that certainly would be the case,” Spat told ABC News. told.

After all, the historically high inflation we are seeing now is becoming impossible for consumers to ignore, House said.

“When you’re seeing about 2% price increases, it’s running in the background, that 2% number is by design,” House said of the past. “But when we’re seeing 5, 6, 7% inflation, it’s hard for consumers not to notice, and that starts to affect how they think about their decisions, including how they go from job to wage. What are you asking in the matter?”

Asking for a higher wage is usually a good thing, but in times of inflation, those who worked during the 1970s and ’80s know that it can be linked to even more skyrocketing prices – and On a broader level, throw a wrench in efforts to completely rid the economy of inflation.

Policies to combat inflation have historically had painful consequences

Inflation has historically been extremely difficult to eradicate, and past attempts by government and policymakers to do so have sometimes had painful consequences.

At the same time, the inflation we are seeing now is being driven by very different circumstances than in the past, notably a global pandemic and the supply-demand imbalance induced by fiscal and monetary policies, which have affected the economy during an unprecedented health crisis. gave speed to

As the supply chain recovers from the shock of the pandemic and the reach of pandemic-era stimulus policies dwindles, many remain hopeful that it will help ease inflationary pressures.

Economists also note that policymakers now have lessons from the past on how to best respond to inflation.

During the “Great Inflation” The period of the 1970s and 1980s, the most recent inflationary period, for those who are warning their children on the verge of retirement, inflation spiraled out of control as prices climbed and workers asked for higher wages in return – now economic This is causing the phenomenon known as the “wage-price spiral”.

Wages are rising at re-headlining rates as major companies – particularly in the service industry – report struggling to attract and retain employees.

“We’re in a tight labor market,” House told ABC News, meaning workers “are able to flex some of that clout a little more, and extract some more pay increases from their employers”. .

“We’re seeing this filter to some degree in inflation expectations; we’re also seeing it filter into wages, and so I think it’s going to be important in the coming year to see how far down inflation comes down,” House said. ” “We are expecting it to decrease, given some of these pandemic distortions – but I think now that we are seeing more pressure from wages in the labor market, it will be harder to cool off.”

As a result, the House said he expects the Fed to “take a little more aggressively” than they initially planned to help reduce inflation.

This will likely manifest in interest rate hikes, which the Fed has already indicated are likely to happen three times in 2022, and a more rapid end to pandemic-era monetary policies that have flushed financial markets with liquidity. Did.

These actions could help calm inflation and uncertainty, House said, because “it will send a signal to markets, consumers, businesses that they are on top, that they are seeing inflation numbers and they don’t want to give up.” It gets out of hand, or at least gets out of hand.”

“This signal will help reduce inflation expectations and may have an impact on further pricing, whether for goods, services or labour,” she said.

Looking back in history, the Fed was initially seen as behind the curve and slowing interest rate hikes in the ’70s to respond to inflation – a sudden increase in federal funds of about 20% in 1980. before announcing the rate hike. Holding bonds either directly or through retirement accounts resulted in huge losses, and real interest rates soared as well. The move ended with a cascading effect that devastated the overall economy as well as the stock market.

“The difference here is that we have some forces that I think will help bring inflation down on its own,” House said, comparing current inflation in the late ’70s, such as the pandemic-era fiscal Support to boost consumer demand. And changing patterns on how consumers are spending their money.

“It’s a fine line to walk for monetary policy, between not putting off a recovery or expansion and not letting it overheat to the point where you have more pain down the road,” she said.

With only so many tools at the Fed’s disposal, she said, the Fed can’t manufacture semiconductor chips or do much to address the beleaguered global supply side of the equation.

In figuring out how to improve inflation without triggering an economic downturn, simply put, the House said the Fed “is not in a very deep position.”

So how can Americans protect their hard-earned money?

On an individual level, meanwhile, Carnegie Mellon’s spat warns that there is little consumers can do on their own to tackle inflation once it takes root in the economy.

“Individuals can, of course, try to make the best decision they can see for themselves,” Spat said. “To the extent that they see opportunities for higher wages, obviously, they should go for them. To the extent that they see prices that haven’t gone up yet, but they think are going to go up, they Want to lock in their purchases.”

To protect their savings, said Spat, Americans “might want to consider buying bonds or buying equities, or be more open.”

Uncertainty due to inflation has traditionally been bad news for the stock market, but stocks have historically been a good source of wealth for investors looking to grow wealth over the long term. Whereas strong stock investments (and vice versa further…

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