Photo of Eric Ebbert CFP®, MBA Eric Ebbert CFP®, MBA May 02, 2022

A Few Inflation History Lessons

Over the past 12-18 months, inflation began to crescendo. The media is consumed about discussing inflation, but the cracks are starting to appear. Last month, inflation hit a 41-year high of 8.5%, but the Fed pays more attention to the core rate (without energy and food) which declined to 6.5%. While gasoline was up 18% and food costs up double-digits, used car and truck prices declined by 3.8%. Not much, but it is a start.

We may see a slowdown in the price escalation of home prices and rents. How is that possible? Let’s use an example and assume the median home price in the U.S. is $375,000 as well as a conventional mortgage of 80% financing with an interest rate of 3.2% for 30 years. This calculates to a monthly payment of $1,294.

Two weeks ago, mortgage rates hit 5% for the first time since 2011. That same mortgage now costs $1,604 monthly, which is $310 more for a 24% increase. How does a household with a median income of $44,255 afford that kind of monthly payment? We don’t think they can. 

We expect the lower end of the housing market to slow first and then move upstream. We are not suggesting that prices will decline as much as we are saying that increases will be smaller. For many young folks, 5% is an unheard-of interest rate, but to some Baby Boomers this isn’t anything like the 70s when mortgage rates reached into the mid to upper teens. Rents have risen just as dramatically as home prices and in some cases even more. While landlords have been able to increase rents, these increases should also slow down. 

Though gasoline prices should come down, they won’t come down as quickly as they went up. The war in Ukraine has destabilized oil pricing for the near future. But an even bigger adjustment will occur as consumers drive their autos and trucks less and look for alternative ways to get to work through public transportation and carpooling. They may not go out to dinner as frequently or travel as far on vacation. Electric vehicles are becoming increasingly popular. Like other times of high gasoline prices, lower demand will help to lower prices.

From an investor’s standpoint, higher interest rates will cause bond prices to go down. In fact, the first quarter of this year saw the largest decline in bond prices in 40 years. Over the past few years, most of our clients have been on the short end of the yield curve which is not as volatile as bonds at the long end. In addition, we spent much of last year looking at bond investments that should do better in an inflationary environment than the traditional approach. On the equity side, investors should be looking at companies with great balance sheets that have cash to invest in their future growth.

If the Feds wants to attack inflation more quickly, it needs to slow down the money supply. On May 3rd, the Fed meets and will likely try to tame inflation by making a 50-basis point hike. The higher interest rates should slow down growth, but it will likely take a greater increase in rates than is anticipated to cause a recession in the next year. 


Tax Time Has Come and Gone, but What About Audits?


Most Americans have now filed their taxes for 2021 and are breathing easier. Who should expect an audit? According to the IRS, four out of 1,000 were audited in 2021. Doesn’t sound like a big number, unless you happen to be one of the four.


While audits on high-income earners create more revenue, the reality is that more audits are performed on lower income households and are usually done via correspondence. What are situations that may trigger an audit?


  • Simple mistakes like forgetting to report all your income.
  • If your business makes little or no income or consistently loses money, the IRS may question its legitimacy as a business over a hobby.
  • Pass-through-business where the business makes a lot of money, but the owner takes a small salary.
  • Large charitable donations from non-cash contributions. The non-cash items often require a certified appraisal.
  • Cryptocurrency: Don’t try to hide these investments, which if discovered, will likely lead to fraud charges.


What is the best thing you can do to avoid an audit? Report your income, take accurate deductions, and don’t try to skate over the line by cheating.


So How Is ESG Holding Up?


One of the most common misconceptions of ESG (environmental, social, and governance) investing is that a values-based strategy will cost you returns. The truth is that ESG investing might be more like a standard portfolio than you think. Most ESG investing uses a best-in-class framework where the strategy uses ESG scores to weight company exposures within an industry, overweighting companies that score higher in each sector. The result is a portfolio with a more positive impact from an ESG perspective (lower carbon footprint, more diverse board representations, better worker safety measures, etc.) without deviating much from a conventional benchmark. The ESG version of the S&P 500 index is slightly outperforming the traditional index this year.


Our ESG strategies at ProVise are multi-layered in their approach. They begin by excluding certain industries and then optimize the remaining universe to maximize exposure to companies with the highest ESG ratings. If you are interested, reach out to one of our financial planning professionals to learn more about ProVise’s customized ESG investment solutions and how they could help you reach your future goals.

I Bonds May Become Even More Popular


Though we have previously discussed I Bonds, let’s do a quick refresher. You buy them directly from the U.S. Treasury in a digital format from a minimum of $25 to a maximum of $10,000 per taxpayer in one calendar year. You can also purchase up to $5,000 in paper form through a tax refund. Thus, the maximum in any one year is $15,000 per taxpayer.

The bonds have a 30-year life. The interest that is paid is a combination of a fixed rate for the life of the bond plus an inflation rate reset every six months. The current combined rate was 7.12% for bonds bought through April 28. But come May 2nd, the combined rate is estimated to be 9.62% which will be paid for the next six months before it is adjusted once again. It could go up or down based on the inflation rate. You must hold the bond for at least one year and if you redeem it within five years, you will give up 3 months of interest, much like a CD. After five years, the penalty disappears. While the $10,000 and $5,000 limits are a drawback, over a period of years these I Bonds could become a valuable cash alternative tool.


Inflation and Social Security


After years of meager gains in Social Security due to inflation, recipients this year got a 5.9% increase – the largest in years. But with inflation running at 8.5% in March, all recipients are behind the curve. Social Security is adjusted by the inflation rate in the 3rd quarter of the year. While it is early, the estimates from the Senior Citizens League are for an increase in 2023 of 8.9%. The 8.5% increase in inflation is the largest since 1982 and the COLA increase in Social Security would be the largest since 1981. It will definitely help retirees, but it will also likely deplete the Social Security trust fund even faster. Congress – Where are you?


What’s Ahead For Women?


As we start the third year of Covid-19, Fidelity’s “Money Moves Study” asked “What’s ahead for women”:


  • 58% identified the Pandemic as influencing how they think about money and make financial decisions.
  • 36% identified lack of preparation for handling emergencies.
  • 30% identified a career transition in the next six months.


Despite these concerns, Fidelity found that more women are investing than ever before. However, women continue to ask questions like “Can we afford to invest?” or believe that their savings accounts are the best place to invest their money. Do you need help answering these questions?


Retire From Retirement


Just like Tom Brady, not everyone finds retirement all it is cracked up to be. According to Indeed Hiring Lab, in March this year 3.2% of those that had been retired for a year or more returned to the workforce. A shortage of skilled workers, higher pay, inflation, the ability to work from home, and boredom were a few of the reasons cited. It will be interesting to see if this trend continues and perhaps even expands.