The Inflation Situation

If there’s one word that has been top of mind in the financial world over the last year, it’s “inflation”—with “the Fed” likely coming in a close second. With all the talk about the subject recently, here is some context around what inflation and the Fed are and, more importantly, how they impact the world of financial planning.

Inflation and the Fed:

If you looked up inflation in a textbook, you would see something along the lines of the rate of increase in prices over a given period of time. To give a more concrete example, think about a trip to your favorite fast-food restaurant. Remember the dollar menu? As prices throughout the economy have increased over time, restaurants are now hard pressed to offer menu items at a dollar, and very few still do. That’s inflation at work.

Inflation isn’t always a bad thing, though. In fact, inflation of 1-3% per year is considered to be healthy for the economy, and the opposite of inflation, deflation or the decrease in prices overtime, is considered to be very detrimental. Inflation only becomes an issue when it starts creeping above the1-3% range (which is what we’ve been experiencing recently), and that is where the Fed comes in.

The Fed, or more properly “the Federal Reserve” is the central bank of the United States, and it is broadly tasked with promoting stability in the U.S. economy. To be more specific, the Fed has what is often referred to as a “dual mandate”—maintaining maxi-mum employment and promoting stable prices (in other words, maintaining a stable level of inflation). People are often surprised to learn that the Fed does not have a mandate to promote stability in the stock or bond markets. Its responsibility is to prevent inflation and protect employment in the economy as a whole, and it is willing to cause short-term pain in the markets in order to achieve these goals.

One of the primary ways the Fed tries to achieve stability is by adjusting interest rates in the economy. Higher interest rates make borrowing moneyless affordable. A major purchase (e.g., a person buying a home or a business buying a new factory) that might have been a good idea at lower interest rates might no longer be appealing at higher rates. The goal of these rate increases it to put a damper on the economy in order to help rein in inflation. This is what the Fed has been doing for the last year or so, and it’s starting to work as we’re beginning to see inflation decline.

Inflation and Social Security

For those on Social Security, increasing prices can be particularly scary. The good news is that the Social Security Administration reviews the cost of living each year and makes adjustments to its benefit offerings. This is designed to help Social Security keep up with inflation and prevent Social Security recipients from losing purchasing power as prices increase.

To help combat the higher level of inflation that we have been experiencing lately, the last two inflation adjustments from the Social Security Administration have bene some of the largest in history, with the 2021 increase coming in at 5.9%, and the most recent increase for 2022coming in at 8.7%.

One important clarification with the Social Security cost of living adjustments (COLA) is that you do not have to be collecting benefits to receive the increase. In fact, in some cases, it’s even more beneficial to delay your benefits to receive delayed retirement credits that increase your benefits the longer that you wait, while the COLA increases are then added each year to your higher benefit amount.

Inflation has broad impacts—from the prices you’re seeing at the grocery store to increases to your Social Security payments—but ultimately, the greatest impact of inflation is long term for those planning retirement and/or savings strategies for financial independence. It’s now more important than ever to check in with your personal financial plans to make sure everything is still on track.

This fall, we will once again be providing our Savvy Social Security educational events in partnership with AAA Minneapolis to help AAA members understand their options when it comes to different filing strategies, divorcee and spousal benefits, taxation and some unique "outside-the-box” financial planning techniques that you can act on today. Please visitAAA.com/Events for more details and to register.

For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentionedherein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy orcompleteness cannot be guaranteed. Past performance does not guarantee future results.Steven C. Finkelstein, CFP®, Megan E. Gehrman, CFP®, and Luke J. Strom, CFP® are Financial Advisors at Sterling Retirement Resources, Inc., 120 Broadway Ave S. Suite 200, Wayzata, MN55391. 763-762-3400.Securities and advisory services offered through Cetera Advisor Networks LLC, Member FINRA/SIPC, a Broker-Dealer & Registered Investment Advisor. Some advisory services also offeredthrough AdvisorNet Wealth Partners. Cetera is under separate ownership from any other named entity