The US inflation rate is up over 6 percent this year as of December 2021 and continues to climb higher. It could be near 10 percent or higher by the end of the year. This is bad news for the consumer because that means prices are going up. It is not hard to see with the cost of gas prices rising as well as home prices. The US money supply has exploded over the last year which is likely one of the reasons. 40 percent of all money was created in the last year. The stimulus packages seem to have no limit or end in sight.
What does this mean for the consumers and investors? It simply means your money is becoming worth less. To keep pace with the inflation you need to make a 10% return. A simple example is you have $100 at the beginning of the year and with that $100 you can buy a nice pair of shoes. With a 10 percent rise in inflation, that same pair of shoes will now cost $110 at the end of the year. If you left $100 in the bank earning less than 1 percent interest, that $100 cannot buy the same amount of stuff it did at the beginning of the year.
This is worrisome for the average American because it is likely most will not receive a 10 percent raise just to break even. Inflation is a hidden tax on citizens. The central banks print more money, making it worth less and robs the people of their purchasing power and most do not understand that. It becomes clear though when the cost of everything goes up and you are unable to afford what you used to.
Fixed rate, low interest mortgage debt is a hedge against that inflation. If your mortgage is fixed at 3 percent and inflation is 10 percent, then your debt burden got reduced because you are paying it back with cheaper dollars. To better understand this concept, take inflation to the extreme. Say inflation gets so bad that the price of a loaf of bread rises to $100,000. Well then, I can pay off $1 million of mortgage debt with 10 loaves of bread and own the properties. That is the reason I am ok with having $1 million in mortgage debt. The faster inflation ticks up, the cheaper that debt is. Fixed rate, low interest mortgage debt is becoming an asset in these money printing times.
There seems to be no end in sight to money creation, even at the expense of the poor and middle class. They are usually the ones that suffer most. Rich people benefit from inflation because they own assets, and the assets keep inflating. The key is to own assets that appreciate faster than the rate of inflation to keep your money growing, otherwise you get left behind. There is a dynamic shift in the economy and the old rules that were learned do not really apply anymore. If you save money and keep it in the bank earning less than 1 percent, then you are losing almost 10 percent a year due to inflation.
