Key Highlights:
- Inflationary pressures are strong: Prices of goods, including food, energy, and services will continue to rise due to supply chain issues, labor shortages, and the conflict in Ukraine.
- Higher expenses/cash flow assumptions should be managed: Sales growth is expected to decline in 2022 while costs are expected to increase; therefore, 2021 financials should not be used as benchmarks to forecast expenditures and cash flows for 2022.
- Substantial uncertainty and market risks exist: Asset values and financial market conditions will continue to be unstable and volatile. Business owners and investors should understand risks and their personal risk tolerance.
- Interest rates are rising and will continue to increase: Higher interest rates will make it more expensive to borrow and consume money while lowering purchasing power. Therefore, it is important to ensure that savings earn interest income.
- Exercising thoughtfulness and caution: With economic and geopolitical uncertainties, exercise caution and financial prudence in your personal, business, and investment decisions.
Advisory:
The Economic Planning Board for the USA would like to address the following commonly asked questions:
- Why, and for how long, will things be more expensive? And what kind of an impact is the conflict in Ukraine having on the U.S. economy?
Inflation, or an increase in prices of goods and services, accelerated during the pandemic due to supply chain disruptions and increased costs of services due to labor shortages.
The conflict in Ukraine is expected to keep inflation high for longer than expected as the flow of goods and services that depend directly or indirectly on Russia and Ukraine are disrupted. Most notably, on energy prices, with the cost of oil drastically increasing since December 2021.
The impact of rising prices will affect individuals in multiple ways. For example, higher costs for groceries, gas, and other essentials, while businesses have faced cost increases in labor, materials, rent, and overall supplies. Tthe full long-term impact of the international conflict on the U.S. economy remains uncertain.
- What are some key challenges and opportunities in this inflationary environment?
Challenges: Business owners are facing higher costs of inventory and labor. As necessities such as gas, food, and rent increases affect consumers, they may be less willing to spend on other discretionary items, resulting in lower revenues for businesses. Businesses should consider lowering their fixed and variable costs, such as marketing, renovation, and utility expenses. Business owners may also need to openly communicate with customers about increased prices.
Businesses should not plan to earn or spend money using 2021 cash flows as a benchmark. mindful that 2021 was an exceptionally strong year for retail sales, and sales in 2022 are expected to grow at significantly slower rates.
Opportunities: Business owners with excess capital should consider investing in technology solutions that can help them better manage business costs or capture higher revenues. For example, business owners could consider implementing self-check-out and delivery options, or use of battery powered equipment for both homes and businesses to manage their energy costs.
- Should I expect to pay or receive higher wages?
Labor shortages are expected to continue in the immediate future as fewer people are participating in the labor force now than before Covid. These labor shortages are resulting in wages increasing faster, especially at the lower end of the pay scale.
For business owners, this potentially means lower earnings if higher wage costs cannot be passed-on through price increases. To combat this, businesses could consider hiring employees with less experience and training them up or turning full-time positions into a part-time roles as employees look for more flexibility post-Covid.
Wage earners and professionals should test the job market to ensure they are being compensated appropriately and negotiate with their current employers as necessary.
Employees are continuing to prefer options for remote and hybrid work, even as the pandemic eases. Individuals should consider how these trends might affect their personal employment options, businesses, or create new opportunities for improved work-life balance.
The Economic Planning Board encourages all individuals to invest in the development of their skills through lifelong learning. This helps protect you from being replaced and better positions you for careers of the future.
- Where should I invest? And what levels of risk-taking is appropriate?
The stock markets continue to be volatile, especially since the onset of Russia’s military activity in Ukraine. After a January 2022 high,the S&P 500 is down approximately 10 percent so far this year. During this period of uncertainty, investors should expect stock markets, and asset prices in general, to fluctuate.
Investments in bonds are likely to be more stable but they will also be impacted by rising interest rates. Residential real estate assets continue to benefit from a shortage in home inventory, but prices may stabilize as the Fed continues to raise interest rates. Commercial real estate forecasts remain mixed as the pandemic and supply chain disruptions continue to reorganize how the different types of commercial real estate assets are utilized.
When making new investments, investors should consider different risk factors that might affect cash flows and assets values. Additionally, investors should be mindful of their own risk tolerance, time periods of investment, the ease with which assets can be liquidated, if necessary, and the overall diversification of their investment portfolio. Lastly, remember that while the U.S. economy has been experiencing growth and high returns over the past decade, historical trends do not guarantee future performance.
- Do I have sufficient savings?
All individuals should save and invest with their longer-term goals in mind. Families should plan for increased expenses for healthcare and housing, and long-term care assistance costs for retirement. EPB offers retirement planning education and can assist interested individuals.
In the short-term, all families should establish a rainy-day fund with cash on hand to cover at least 6 to-12 months of business and personal expenses. That said, as interest rates rise, the purchasing power of the dollars will erode, so it is important to put savings in interest bearing instruments or accounts.
- How should I manage my debt in this current economy?
To keep rising costs in check, the Fed already increased interest by 25 basis points, with an indication to increase interest rates at least six more times. As such, individuals with debt are encouraged to refinance (or repay) their debt if they haven’t done so already – including mortgages, auto loans, business loans, and credit cards – while interest rates are still relatively low. This is especially important for longer-term debt, particularly with a fixed interest rate, so a lower rate can be locked in for a longer period of time.
Moreover, all individuals should examine how their financial stability might be impacted if business and asset values decline, but interest rates rise. The EPB is available to assist individuals confidentially with managing high credit card and other consumer debt.
For assistance or advice on any business or personal finance matters, please contact EPB by using the ACCESS Help Line: 1-844-55-ACCESS (1-844-552-2237)
