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Monday, September 26, 2022

With Inflation At A 4-Decade High And Stimulus Checks A Distant Possibility, It Is Time To Make The Most Of Your Limited Earnings

May inflation rates released by the Labor Department reveal that it continues to be at a record high year-over-year by expenditure, standing at 8.6% for all items. And it is the highest when taken individually for Gasoline (all types) where it stood at 48.7% year-over-year. It also remains high for utility gas service (piped) at 30.2% while for airline fares it was at 37.8%. In the absence of a further federal stimulus check, it has badly hit the low and middle-income groups.

It has put pressure on employers to raise wages to keep pace. An unusually tight American labor market, combined with spiking food, essentials, and gas prices is being blamed for creating pricing pressures across the country. The war in Europe has further complicated matters.

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While the Republicans have blamed the Economic Impact Payment, or the third stimulus check for inflation, analysts say that its impact was too little and too far to have made any real difference to the current situation.

The long-term average inflation rate hovers around 3.2% even though citizens have grown used to a more moderate increase in annual prices averaging 1.75% from 2010 to 2019.

Upward Pressure On Wages As Stimulus Checks Remain Elusive

Reports from the Bureau of Labor Statistics (BLS) on June 3 revealed that wages continued to climb in May. It has driven concerns of an inflationary spike in wages. Average hourly earnings over the past 12 months ending May revealed a 5.2% increase in non-farm payrolls. It is down slightly from the April Year-Over-Year rise of 5.5%.

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The upward pressure on consumer prices is not likely to relent much anytime soon as the core price index, stripped of the volatile areas of energy and food, rose 6% in January as compared to a year previously.

Investing And Saving Smartly In The High-Inflation Period Becomes Necessary In Absence Of Federal Stimulus Checks

With the third stimulus check proving to be the last federal relief payment, investing wisely has become a key to beating inflation. For instance, the average annualized return on the S & P is around 10%. So it is advisable to balance investments in both the company’s workplace retirement account and also rely on a brokerage account for additional savings.

It can be viewed as a midterm to long-term saving and should give compounded returns. Most analysts have emphasized the significance of investing in stocks to counter inflationary pressures.

Government bodies such as the Treasury Inflation-Protected Securities (TIPS) help protect investors from inflation. The principle of a TIPS rises with inflation and decreases with deflation, as measured by the consumer price index.

Investors can also weigh commodities and real estate. Such tangible commodities and assets are also something that can be considered during inflationary phases. Last year, oil, natural gas, and broad commodity baskets have led the sectors in year-to-date returns at a time when inflation fears mounted.

Investing in energy and food, always in high demand, is a san choice as staples are always among essentials, and companies dealing in them have the ability to jack up prices when riding the inflaton wave.

Being on the lookout for tax efficiency in a brokerage account will help combat inflation. To maximize tax efficiency, investments that do not lose much of their returns to taxes are more suited for taxable accounts. Those that lose more returns to tax should be designated in tax-advantaged accounts. Tax-efficient investing will minimize the tax burden and you end up paying less on earnings on investments.

Seeking out companies that invest in businesses with low capital needs is a prudent move, especially in times of inflation. Investors should seek out companies that can increase prices rather easily without any corresponding loss of sales and revenues.

Keeping excess cash in hand during inflation beyond that needed in an emergency is unadvisable the stock market is at an all-time low and over the medium and long term can bring in a high rate of return.

And finally, it is necessary to be prepared for emergencies during such difficult times. At least 3-to 6 months of expenses should be there as a backup in case of emergencies. Towards this end, consumers need to keep an eye open for high-return savings accounts.

Homeowners Cash In On The Work-From-Home Boom: Job Hoppers Are In For A Boom Time

A sector that has benefited from the pandemic is housing. As remote workers moved away from the cramped confines of city apartments to more spacious suburbs, demands for housing skyrocketed. Homeowners are now better-off than ever with close to $10M equity up for grabs.

By end-2021, 42% of homeowners were equity rich with their mortgage below 50% of the home value. This is way better than the 30% who reported that figure in 2020.

But it has also hit the dream of the middle-class owning a home of their own as sale prices hit an all-time high.

Workers who have changed jobs have benefitted too and many have been fortunate to receive a pay rise that has beaten the 4-decade high inflation rate.

States Remain The Only Hope Of Getting Stimulus Checks

As federal stimulus checks dry up, states are using surplus revenues in 2021 and funds received under ARPA to help out low and middle-income residents. More than a dozen states are at an advanced stage of passing laws while some states have already legislated to send stimulus checks to their residents.

Maine for instance has moved ahead with legislative measures to send an $850 stimulus check to taxpayers in the state. Gov. Janet Mills has signed a supplemental budget that will give the stimulus check to taxpayers with adjusted gross income less than $100,000 in case of individuals and $200,000 for married couples, who will receive double the amount.

New Mexico Governor Michelle Lujan Grisham has also signed a law to give multiple stimulus checks to filers. Individual taxpayers earning below $75,000 will receive a $250 stimulus check. Another rebate worth $500 will be issued to all taxpayers split into two equal installments. Residents who have filed their 2021 returns will automatically receive the stimulus checks.

California is not going the stimulus check route and has instead opted for a gas card for vehicle owners worth $400 (with a maximum permissible for two vehicles per family), and transit cards of an undetermined amount. Democratic legislators have proposed other ways including a $200 stimulus check to taxpayers with AGI below $250,000.

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