It’s hard to fathom inflation being anything other than a gloomy trend when many Americans are feeling the pain of sticker shock at the gasoline pump, grocery store and elsewhere. But advisors say there are indeed some bright spots to high inflation.
“I don’t want to sound flippant about it,“ said Howard Hook, a CPA and certified financial planner with wealth management firm EKS Associates in Princeton, N.J. “But there are some things that will offset [the pain of inflation] to some degree."
Consumers continue to be wary of the economy, even as the consumer price index, a key inflation barometer, showed signs of cooling this month. It posted a 7.7% increase from a year earlier, compared to 8.2% in September. It reached 9.1% in June. But persistent high interest rates and higher prices for food, energy, shelter and other goods and services, have shaken consumer confidence. A recent University of Michigan Survey of Consumers showed consumer sentiment dipped 8.7% from 59.9 in October to 54.7. The report further showed that the current economic conditions index fell 11.9% to 57.8, and the index of consumer expectations for the next six months dropped 6.2% to 52.7.
But Hook points to a few positives, such as the 8.7% cost-of-living increase that retirees will get in their Social Security checks starting in 2023. That, he said, will reduce the sting of the higher expenses that they are experiencing. He also noted that pensions and annuity payments, which also are tied to the cost of living, will increase.
Tax-related adjustments in the coming year also are positively affected by inflation. Hook noted, for example, that the standard deduction for married couples filing jointly for tax year 2023 will rise by 7% to $27,700. The increase for single taxpayers and married individuals filing separately will be $900 to $13,850, and for heads of households, it will rise by $1,400 to $20,800. This all means that more income will be taxed in lower tax brackets, Hooks said. Additionally, the annual gift exclusion will increase by 6.25% to $17,000.
Also, in response to the high inflation, the Internal Revenue Service recently doled out the biggest increase in decades for contribution limits for 401(k)s, 403(b)s, and other tax-advantaged employer savings plans. The contribution limits in 2023 will rise by $2,000 to a maximum of $22,500. Also increasing are the limit on annual contributions to an IRA from $6,000 to $6,500, and catch-up contributions for those age 50 and over will jump from $6,500 to $7,500.
An important area to think about during inflationary times is the value in your real estate, said Jay Hendricks, director and portfolio manager with Crestwood Advisors in Darien, Conn. This especially applies to people who are not wealthy because positive inflation usually benefits the rich, he said. Hendricks noted that 65% of Americans own their homes and high inflation is good for home ownership because the value of the home ticks up. And with the vast majority of mortgages held in America at a fixed rate, Hendricks said that means they have a fixed payment, and to add to that, wages also are likely to go up in the rising rate environment, he said.
“Their payments are fixed, the value of the asset is going up, and so weirdly enough, the higher inflation actually makes it easier to pay off fixed rate debt,” Hendricks said. “It’s good if you have a mortgage or a fixed rate on a car loan for instance,” he said, noting that it is not so great if you have credit card debt, which does not have a fixed rate.
Other areas that inflation has positively impacted include interest rates in your bank accounts, Hook said. Though not directly tied to inflation, he said, bank rates come into play during inflationary times. “You can buy a Treasury bill that’s yielding four-plus percent,” he said, adding that certificates of deposit and money market funds also are paying higher interest rates, albeit not enough to offset inflation. “But for a conservative investor who is not willing to want to take exposure to the stock market, at least they can get some return now on their money as opposed to the last 10 or 12 years where they practically got zero,” he said.
And for those who might have excess cash reserves, Hook suggests putting it in Treasurys. “People probably didn’t focus much on their excess cash reserves prior because they just weren’t getting returns anywhere outside of the stock market,” he said. But now is a good time to focus on excess cash reserves, he said. “You may want to at least grab yield now,” he said, noting that the good thing about Treasurys is that they are exempt from state and local taxes.
Hook said inflation impacts everyone differently. Someone who does not commute, or a retired person may not be affected by higher gas prices, he said. “When you look at your personal inflation, you want to look at some of the positive things,” he said. “You want to look at things in totality.”