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Slow Boiling Frogs: Depleted Household Savings and On-Going Inflation: From advisor Evan Hewitt …

Recent news of slowing inflation has us exhaled with relief, but it’s important to remember that the slowing of inflation isn’t the end of inflation.

“Why can’t you just let us enjoy this moment, Evan?” you might ask. Well, as financial advisors, we have to stay ever-vigilant, and there are two particular groups of people I’d like to caution with this article.

March 2020-23 Inflation - Source: Statista

To the first group: consumers. Unless you’re living off a stockpile of goods in your basement, this note is for you. Remember that inflation doesn’t occur evenly across the board. You feel it more or less, for longer or shorter, depending on where you spend (see below). You may have noticed the price of goods starting to drop (smartphones, used cars, bacon), but services (restaurants, medical care, repairs) might take a while since their prices are more bound to the labor market, which still faces a serious shortage.

Again, inflation is easing. It hasn’t ended, and we don’t know how long it will take until it has been sufficiently mitigated. Spend accordingly.

Now for the second group: those carrying credit card debt. It’s the most common form of debt for households to carry, and right now, many homes that do are facing the double whammy of increasing that debt while that debt gets increasingly expensive.

In 2021, US household savings accrued $2.3 trillion in savings. However, it has since been spent down to $900 million. Additionally, a recent survey shows a majority of households are saving less because of inflation (below).

Now, consider this: 72% of those with credit card debt added more to it in the last year (very possibly you among them). But did you notice your credit card interest rates increasing with that increased debt load? As of last week, average rates are +24%. Big picture: households are depleting savings, increasing debt loads while that debt gets increasingly expensive, and all of this in the face of untamed inflation.

The image of the slow-boiled frog comes to mind.

Having enough cash on the sidelines is the difference between covering an unexpected expense and taking on more high-interest debt. Unfortunately, 2023 will tip many into a vicious debt cycle if they are not careful. As always, talk to us (your advisors) if you think this could be you.

Some simple preventative measures to consider:

  1. Be mindful of your budget/spending in the face of inflation. (It can be tempting to close your eyes and ride it out.)
  2. Be aware of your credit card debt load and interest rates, especially if you’re not auto-paying the entire sum of your monthly statements.
    Inflation erodes the purchasing power of your savings. Fight it off. Check what interest rates your banks are giving you. (We’ve been helping clients do this with competitive money market accounts and treasuries. Be in touch if you’d like our help.)

Business Briefing

  • Slowed Economic Growth: Economic growth slowed to a 1.1 percent annualized pace in the last quarter from a 2.6 percent increase in the fourth quarter of 2022, the Commerce Department reported Thursday. The slowdown came as many economists warned the economy could be heading into a recession as the Federal Reserve aggressively raised interest rates to cool the economy and bring down inflation. Thursday’s Census Bureau analysis said the end of extra pandemic-era food subsidies on March 1 also contributed to the slowdown by reducing consumption. About one in four households who received the benefits, or about eight million Americans, say they “sometimes” or “often” don’t have enough to eat now that the program has been lifted in 32 states. (Bloomberg)
  • Amazon Sales Bounce Back: On Thursday, Amazon reported a sales growth surge in the first quarter of 2023, bouncing back from a post-pandemic slowdown. The online retail giant said sales increased 9 percent compared to the same period last year to $127.4 billion, beating analysts’ expectations. Amazon’s quarterly profit came in at $3.2 billion, nearly 50 percent better than expected. The company has taken steps to reduce costs, including two rounds of layoffs totaling 27,000 workers, as it focused on boosting profitability. Amazon shares jumped more than 10 percent in after-hours trading following the report, then gave back the gains after executives revealed that revenue growth in Amazon’s cloud-computing unit had slowed in April. (Bloomberg, The Wall Street Journal)
  • Bed Bath and Beyond … and Bankruptcy: Bed Bath and Beyond shares plunged 25 percent on Monday after the struggling retailer filed for bankruptcy protection. The company announced Sunday it was holding a liquidation sale after failing to line up the needed funds to continue operating. Bed Bath and Beyond now plans to use the Chapter 11 process to keep it going as it sells off inventory and salvages assets like its Buy Buy Baby stores. (The New York Times)

A Decade of Service: This past Wednesday, we gathered to celebrate our very own Kaitlin Salwach. Kaitlin has worked in client services and has demonstrated wonderful attention to detail and personal care for the many clients she has worked with over the long term. We are indeed grateful to have her as part of our team over the last ten years. Congratulations Katie!