A couple of months ago I began a three-part series on the importance of financial literacy and a basic understanding of inflation and economy in general, especially for our younger generations.

Part one detailed how many Americans erroneously think they are financially literate, and why it’s imperative we teach our children fiscal responsibility so they can improve the quality of their lives and future generations.

Part two explored ways to adapt to an uncertain economy, based on predictions and suggestions from Dr. David Phelps, a renowned finance expert and one of 13 people chosen to develop the new financial literacy curriculum for the Florida Department of Education.

Today, for our final installment in this series, I’d like to take a closer look into exactly why our economy is suffering at this moment in time and how this is different from financial hardships of the past.

In addition to explaining key factors that help indicate the state of the economy, I sat down again with Dr. Phelps to explore more deeply exactly why he predicts higher inflation in the future and ways consumers can protect themselves. Armed with this knowledge, you can watch for trends in the economic market yourself and make informed decisions, protecting your financial security.

The Consumer Price Index is still high

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by consumers for general goods and services.

The Bureau of Labor Statistics (BLS), a division of the U.S. Department of Labor, calculates and publishes the CPI each month. It uses data collected from thousands of retail stores, service establishments, and individuals across the country to determine the price changes for various goods and services. The CPI is often used as an indicator of inflation, and by monitoring changes in the CPI, policymakers can assess the inflationary pressures in the economy.

As of April 2023, the CPI for all items, minus food and energy, was 4.9%. This is lower than in June of 2022, when the CPI reached a high of 9.1%, but the last time the CPI hovered around 5% or higher was the Financial Crisis of 2008.

Despite the Federal Reserve raising interest rates a historic 10 times this past year, the CPI hasn’t dropped. If the prices of goods don’t drop, inflation stays high. That seems to be exactly where we are today. Phelps offers his insight on this, saying:

“Most economists at this point feel like inflation’s going to be sticky. That means getting it back down to where it’s been for most of the past 40 years, which is around 2% or under, is probably not going to happen.”

Interest rates are climbing but inflation isn’t dropping

In the past, the Federal Reserve has increased interest rates in order to help reduce spending and cool down the economy, thus lowering inflation.

When interest rates rise, typically this leads to a decrease in consumer spending and investments because borrowing becomes more expensive for both individuals and businesses. Because spending declines, aggregate demand decreases. Oftentimes this causes prices to drop, but that hasn’t happened this time.

While it’s true that consumers are finding it more difficult to secure a bank loan for larger purchases, such as a home or a car, they are still spending large amounts on goods, services, energy, food, and entertainment. Phelps believes that due to the Economic Impact Payments, where many were receiving stimulus checks, consumers didn’t properly adapt to our economic conditions, making the situation even worse.

“Even coming out of the pandemic, people were generally more optimistic because they were still able to resume their lives because they still had a lot of money in their hands courtesy of Congress,” Phelps says. “They had just passed it out, hand over fist, and people were relatively happy. Now the rubber is hitting the road, and people are having to deal with higher interest rates and credit card payments. They’ve run out of the free money, yet they’re still living like it’s ‘business as usual.’”

We are ‘reshoring’ the supply chain

It is not uncommon for many goods sold in the United States to be produced overseas. In fact, most of the products we rely on are manufactured in other countries.

Thanks to globalization, Americans were able to expand international trade and investments. Companies were able to benefit from reduced the material and labor costs available in developing economies, leading to higher profits while still delivering lower cost products and services for consumers. It was a win/win scenario.

In recent years, however, the standard of living in other countries has gone up, meaning the cost to produce overseas and ship here is often no longer a practical option because the numbers no longer work. As a result, many companies are beginning to move their manufacturing sites back to the states.

This will slow the supply chain of many products, and that’s going to be an issue. Phelps adds that in addition to the cost of doing business overseas increasing, we also now face geopolitical issues that will further exacerbate the issue.

“Because of general geopolitical unrest, and because of issues in China and with the COVID lockdown, we need to reshore and bring back the sourcing of products to the U.S. or to friendlier nations.That will incur a huge cost and take a lot of time,” Phelps notes, and says that it’s also going to keep inflation elevated for the foreseeable future.

What does this all mean for you?

Understanding trends in the economy does more for your life than just helping your financial success. It can impact your mental and physical health. When it’s tougher to make ends meet, Phelps says, that can cause negativity and destruction in a person’s life.

“People become depressed. There’s more mental illness, I think, when money’s tight and people can’t live the life they think they should have. When there’s not enough money to go around, that changes the social order. Crime goes way up. That’s what happens during times like this.”

Regardless of the state of the economy, it’s imperative that consumers are continually taking actionable steps to improve their finances.

Try to eliminate variable rate debt. Pay off credit card debt. Take a strict look at your standard of living to make sure you are within your budget and not beyond your means.

This can be difficult, but when you couple fiscal responsibility with financial literacy, you set yourself, and your children, up for financial success—and that’s a powerful winning formula.
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Mario Henry (www.housevisors.com), a former National Football League player, is a financial services professional with 18 years of experience in the industry and author of How to Hire Your House, an innovative guide on how to create a tax-free pension and sustain sufficient income through retirement. Mario also is a licensed insurance broker and a national motivational speaker. He was a wide receiver with the NFL’s New England Patriots and a scholarship football player at Rutgers University.