The New Stimulus Package Might Cause Inflation
Watch the 10-Year Treasury Yields and Crude Oil
Inflation Can Erode Your Retirement Income
The U.S. economy remains challenging for many Americans. In late February, over 740,000 people filed for unemployment for the first time. Yet, the February jobs report (released on March 5th) told a slightly different story—379,000 jobs were added, doubling January’s gains and marking the strongest month of job growth since October. Over 350,000 of those jobs came from the leisure and hospitality sector, hinting at a possible recovery in one of the hardest-hit industries.
While debates continue about whether the labor market justifies more stimulus, another concern is quietly rising: inflation. As stimulus spending continues, so does the risk of inflation—and possibly even hyperinflation—which could have serious consequences for your retirement income.
Two key data points to watch:
The rise in the 10-year Treasury yield
The price of West Texas Intermediate (WTI) crude oil
One could be a warning sign for inflation, while the other could be driving it.
10-Year Treasury Yields Are Climbing
In the past year, the yield on the 10-year U.S. Treasury has more than doubled. While the impact on the stock market is difficult to predict, higher bond yields often make fixed-income investments more attractive. This can pull money away from equities and increase volatility in stock markets.
But the effect doesn’t stop there.
How Higher Yields Impact You
Mortgage rates tend to rise along with Treasury yields.
As banks charge higher interest on mortgages, homeownership becomes more expensive.
Higher housing costs can slow down the real estate market, which impacts GDP growth and can ripple through the broader economy.
Slower growth, higher prices, and reduced consumer spending can feed into an inflationary cycle.
While higher rates can be good for certain sectors, such as financials, they can also increase borrowing costs for businesses and consumers, ultimately slowing economic momentum.
Climbing Oil Prices Add to Inflation Concerns
WTI crude oil is currently trading at around $65 per barrel—levels not seen in over two years. In just three months, prices have risen dramatically.
Why Oil Prices Matter
Oil affects almost every part of the economy:
Fuel prices go up, increasing the cost of transportation.
Heating costs rise, impacting household budgets.
The production of plastics and goods becomes more expensive, increasing the price of finished products.
As these costs climb, inflation spreads. Rising prices reduce purchasing power, which can erode retirement savings and fixed incomes over time.
Inflation Isn’t Always Bad—Or Is It?
Some economists argue that higher inflation reflects a healthier economy with rising demand. Rising interest rates often signal growing economic confidence. However, if inflation heats up too quickly, the Federal Reserve may be forced to step in.
Remember 2016 and 2018
In 2016, the Fed’s first interest rate hike in years triggered a 10% correction in the stock market.
In 2018, further rate hikes coincided with another correction, as investors feared the Fed was moving too aggressively.
At the moment, most estimates suggest we are still a long way from the Fed considering rate hikes. But are we?
If inflation picks up faster than expected, that timeline could change.
What Inflation Means for Your Retirement
Inflation eats away at the purchasing power of your retirement savings. Even low levels of inflation can reduce the real value of your nest egg over time.
Key Considerations
Account for inflation when planning your retirement income needs.
Build scenarios that consider different inflation rates, not just optimistic ones.
Work with a financial advisor to ensure your investment strategy helps protect you against rising prices.
Not planning for inflation is an easily avoidable mistake. At NEST Financial, we can help you build a strategy that accounts for inflation and keeps your retirement goals on track.
Visit our website to contact us to set up an appointment and discuss your retirement goals and how to meet them.