Entering adulthood is hard, and inflation is making it even more difficult.
The biggest jump in prices in four decades is greeting Generation Z as they are graduating from college, moving out on their own and starting their first jobs. Add in property prices that have put home ownership out of reach, plus stocks suddenly cratering after two years of gains, and it is a brutal welcome to the real world.
“Inflation is challenging for younger generations because they have to bear all the costs of inflation, but don’t necessarily own the assets that will help their balance sheet keep pace with inflation,” says Jeff McDermott, a certified financial planner at Create Wealth Financial Planning.
For those who have not experienced market cycles in the past, this sudden change in the stock market and economy is especially confusing. To demystify the world of rate increases and economic gauges, here are a few common questions answered:
What is inflation?
Technically defined as a decline in a currency’s purchasing power, inflation manifests as an increase in the price of goods and services. It is not always terrible and can even promote growth, as long as it is maintained at a relatively low level. The US Federal Reserve aims to keep inflation at a rate of about 2 per cent.
However, the most common measure of inflation in the US — the consumer price index — surged 8.3 per cent in April, compared with the same period a year ago, among the highest readings since the early 1980s.
That means it now takes consumers more money to buy the same amount of goods, plus their cash savings are worth less than they were a year ago.
What is causing it?
It is complicated. The Covid-19 pandemic caused factories and plants to shut down or produce fewer goods, and disruptions to the supply chain made it more difficult to deliver those goods to consumers.
Meanwhile, Covid-19 stimulus cheques and increased savings from months of lockdowns made consumers more willing to spend, particularly as the pandemic eases in many places. That combination — of lower supply and higher demand — is pushing up prices.
The war in Ukraine and resulting sanctions on Russia made the situation even worse by sending prices surging for oil and key food exports such as wheat and corn, which is making it more expensive for regular people to fill up their cars, heat their homes and buy groceries.
How do we fix inflation?
Enter the US Federal Reserve. One of its main jobs is to keep prices stable, which it can do by raising or lowering interest rates. Most recently, the Fed increased the benchmark rate by a half percentage point, the biggest increase since 2000.
Although inflation declined slightly in April from the prior month, it is still extremely elevated and the Fed will almost certainly raise interest rates several more times this year. This is prompting fears of an economic slowdown, which is sometimes an unintended consequence of higher rates.
Why is Gen Z suffering the most?
Younger people usually have less savings and make a lower salary than their older peers, making it even more difficult for them when everyday necessities such as fuel and groceries suddenly cost more.
Plus, many are struggling under debt from college, with 34 per cent of adults aged 18 to 29 holding student loans, according to the US Education Data Initiative. And wages have not kept up with inflation, increasing by only 4.7 per cent in the first quarter from a year earlier.
Gen Zers are also finding that a larger portion of their hard-earned pay cheques is going towards housing costs. Rents have surged almost twice as fast so far in 2022 than in the previous year, particularly in major metropolitan areas such as New York City, where they jumped by 38 per cent in April to a median monthly cost of $3,420 for a one-bedroom apartment, according to rental platform Zumper.
The recent stock market crash is only making matters worse. Longer term, financial advisers say investing in stocks, especially through tax-efficient strategies such as 401(k)s, is a smart move. But it is difficult to watch hard-earned investments shrink, even more so if they are earmarked for a down payment on a house or a wedding.
And timing is everything: for those who put money in the S&P 500 index at its coronavirus pandemic depths in March 2020, they have made a total return on their investment of about 80 per cent. But those who invested at the beginning of this year are facing a decline of about 20 per cent.
It is a similar story in the housing market. Those who owned homes before the pandemic have ridden a nationwide boom in house prices, building equity along the way.
But that same trend has left home ownership out of reach for many younger people. In February, a gauge of home prices in the 20 largest US cities rose 20.2 per cent from a year earlier.
At the same time, mortgage rates are now at the highest since 2009, pushing up monthly payments.
What can you do to protect your wallet?
The main thing advisers stress: don’t panic. Although this year’s drop in stocks has been startling and rising prices are straining budgets across the country, the pain could be temporary.
Historically, at least, equities rise over time. That means it is actually a good idea to invest in broad-based indexes such as the S&P 500 now, when stocks are cheaper, says Jonathan Huss, certified financial planner at Hussmen Financial. He also recommends re-examining your budget and cutting back on items such as subscription services.
Another tactic is to embrace sharing, according to Eric Walters, founder of Summit Hill Wealth Management.
“It is a good time to get a roommate and share the cost of a hotel room with friends for travel,” he says.
Finally, it can be helpful to know which items are most affected by inflation. For instance, prices for fuel and plane tickets are increasing while the movie tickets and the cost of admission to sports events are not.
“Make sure to budget your fun spending, and don’t get caught spending too much for things that don’t really bring you any joy and aren’t necessities,” says Joseph Brady, founder of Rock Financial Planning.