Scary Inflation

[Chuckanut]

What I am finding scary is the inflation rate we are experiencing while still in the economic stagnation. It is currently over 3%! Yet, the Feds are holding interest rates very low, which means I can't even match inflation using CD's at the banks. (And that is BEFOR taxes!!)

I think it is time for the Feds to realize that they are propping up the Banks and borrowers at the expense of savers, and people who rely on their savings fort income. That is not just retired folk. I know many middle age couples who were planning on using interest income to help with expenses, college for the kids, a new car, etc. They are also getting shafted in this environment.

 

[JPatrick]

I think it is time for the Feds to realize that they are propping up the Banks and borrowers at the expense of savers, and people who rely on their savings fort income. That is not just retired folk. I know many middle age couples who were planning on using interest income to help with expenses, college for the kids, a new car, etc. They are also getting shafted in this environment.

The thumbscrews are indeed tightening for these folks.. Two years of no COLA for some also.
The inability to sell a house is coming home to roost as well.

 

[ziggy29]

The biggest problem isn't the inflation itself -- how it manifests itself (concentrated in "necessity" items) and the fact that wage growth isn't keeping up with it. We've had much higher inflation in the past, but these two factors weren't as much in play so it didn't feel as bad.

Two years of no COLA for some also.

One 2% raise in six years here. And combined with the increase in my share of the health insurance premium, my paycheck is smaller than it was in 2005. The sad thing is that I'm still more fortunate than most folks despite this.

 

[Independent]

I'll copy a post from another thread.

Any amount of inflation is a "problem" for us because my non-COLA'd pension is an important part of our retirement plan.

However, when I retired in Aug 2006 I planned for an average inflation rate of 4.0%. In the 5 years since the average annual inflation rate has been 2.1%. (That's a blend of 3.2% for energy and 2.0% for everything else).

So far, I can't complain about inflation, as far as the pension is concerned.

OTOH, I planned for my fixed assets to provide approx inflation plus 2.5%. Today, 10 year TIPS are below 1% (real) and 5-year are negative.

I don't know that the Fed can do much about that without causing bigger problems elsewhere.

 

[samclem]

Those voting for continued low interest rates (despite higher inflation):
- Those who want businesses to do well so they can keep their jobs.
- Those with variable rate mortgages
- Those with fixed rate mortgages thinking they might get another one
- Those heavily invested in equities of rate-sensitive companies
- Politiicians who want the economy to stay out of the dumpster so they can get re-elected
- People with variable-rate consumer debt

Those voting for higher interest rates:
- Those people who save AND who have a big part of their savings in fixed income investments.

I think I know how this is going to come out.

 

[Chuckanut]

SamClem, there certainly are a great number of people who benefit from these low rates. My position is not that the FED drive us into a HIGH interest rate environment. Mine is simply that the they change from our ULTRA-LOW environment to a low environment.

The reality is that a business person is not going to borrow money at any rate if he/she does not see the need to expand. Given the number of savers who are cutting back on spending because their interest income is way, way down, I wonder if that may be hurting us more than helping us. Just a thought? Certainly, most of the seniors I know would spend nearly 100% of the extra income they would get if, for example, one year t-bill rates were equal to the inflation rate.

 

[FIREd]

I think it is time for the Feds to realize that they are propping up the Banks and borrowers at the expense of savers, and people who rely on their savings fort income.

I think they are perfectly aware of that.

 

[chinaco]

...

I think I know how this is going to come out.

I don't know... many middle class Americans (retired and working) are seeing their 401ks (and the like) dissipate and freaking out. Some are thinking, why continue to save if it is just going to be lost in the market. Inflation with manipulated low rates will cause a big outcry (from the silent majority).

If inflation continues, the Fed may end up having to acknowledge that their programs for unemployment are not working (well enough) and causing problems (inflation).

Ironically, they may end up having to raise rates to fight inflation and push the economy into recession themselves.

Here is an interesting article on the Federal Reserve Bank of Boston about the Impact of Inflation.

The Impact of Inflation- Boston Fed

 

[Sandhog]

The reality is that a business person is not going to borrow money at any rate if he/she does not see the need to expand. Given the number of savers who are cutting back on spending because their interest income is way, way down, I wonder if that may be hurting us more than helping us. Just a thought? Certainly, most of the seniors I know would spend nearly 100% of the extra income they would get if, for example, one year t-bill rates were equal to the inflation rate.

I agreed 100%! Looking back in late 70s and early 80s, Apple got started with interest rate high as 20% among other successful businesses like Whole Foods Market, Quiznos, Applebee's to name a few that are still in business. Businesses are always looking to make money no matter what the borrowing costs are since revenue would outweigh the borrowing cost.

Low interest rate in not only hurting the savers but also hurting the free spenders. Free spenders pay over 21% on their credit card debt regardless of interest rate.

I remembered banks used to charge maintenance fees for deposit under certain amount then with competitions on retail banking lots bank offer free checking. Now we are returning to having banks charge fees again. Which means only one thing, due to low interest rate, they don't want depositor's money to lend out to businesses or personal loan. It cost a bank more to have deposit by paying FDIC than borrowing to loan money.

If I was a small bank, I would borrow from government and deposit in a foreign bank where it pays handsome interest rate.

 

[justplainbll]

OTOH, I planned for my fixed assets to provide approx inflation plus 2.5%. Today, 10 year TIPS are below 1% (real) and 5-year are negative.

I don't know that the Fed can do much about that without causing bigger problems elsewhere.

After taxes, is the inflation adjusted return on a 10 yr TIPS positive?

 

[traineeinvestor]

Not to forget that the biggest borrowers are heavily indebted governments who need interest rates to stay low because higher interest rates will make deficit issues worse.

It has not been all bad news for savers - the lengthy period of declining interest rates provided a nice boost to the value of good quality fixed income investments.

 

[Sandhog]

Not to forget that the biggest borrowers are heavily indebted governments who need interest rates to stay low because higher interest rates will make deficit issues worse.

It has not been all bad news for savers - the lengthy period of declining interest rates provided a nice boost to the value of good quality fixed income investments.

I recalled someone said raising 2% of interest rate means $320 Billion dollar more on interest payment that our government owes.

 

[eytonxav]

It has not been all bad news for savers - the lengthy period of declining interest rates provided a nice boost to the value of good quality fixed income investments.

If deficits continue to grow and the money printing press does not slow down the reliance on good quality fixed income (Gov't bonds) is going to go up in smoke very quickly.

Also, I for one would like to see the Fed stop playing interest rate games as its not stimulating anything, and we all need to face the music that to get out of this mess, everyone is going to have to feel some pain and the sooner that happens the better.

 

[justplainbll]

Those voting for continued low interest rates (despite higher inflation):
- Those who want businesses to do well so they can keep their jobs.
- Those with variable rate mortgages
- Those with fixed rate mortgages thinking they might get another one
- Those heavily invested in equities of rate-sensitive companies
- Politiicians who want the economy to stay out of the dumpster so they can get re-elected
- People with variable-rate consumer debt

Add those who want to pay off existing debt with inflated / devalued dollars.

 

[Independent]

After taxes, is the inflation adjusted return on a 10 yr TIPS positive?

Not sure if this is a real question or a rhetorical question. Of course it depends on your tax position.

Add those who want to pay off existing debt with inflated / devalued dollars.

... and who believe that low interest rates cause higher inflation, and that their incomes will go up with inflation.