The situation with 2020 and inflation in 2021

Before going into talking about inflation in 2021 and the situation the prior year, let’s answer some basic questions on what inflation really is, what it means to your pocket, and the overall economy, and how we can act accordingly.

What is inflation?

When we talk economics, inflation is referred to as the rise in price level in an economy over a period of time. But most importantly, it’s talked about because it affects the amount of goods and services you can buy for a unit of currency (example: how much a dollar can buy you during different periods of time will depend on inflation and deflation in the economy).

Who is responsible for inflation?

Inflation is actually manipulated by the central bank or US Fed in the US. They usually try to achieve about 2% annual inflation. This percentage is considered healthy and stable and can lead to a stronger economy. However, not everything can be fully controlled by them and as we said, in a global economy, everything is tied up and the Fed needs to continuously adjust to how different factors may or may not affect our economy.

What causes inflation?

There are many reasons why this could happen and understanding them all is much more complex than what most people would think. In a global economy, everything is connected. So, one act or situation can link up with another and create a chain of events that intertwined change the economy on an international scale. This makes it harder to control inflation for many countries. Thankfully enough, the US has total control over its currency making it easier to control inflation. Some of the most basic and simple examples we can offer about things that could cause inflation in the economy are: increase in production costs (material, wages…) raising the price of the final product or service. A growth in demand can also provoke this when there is not enough product being offered in the market. A clear example is real estate today in some areas where prices are rising above the regular speed due to lack of properties for sale in comparison with the demand.

What was inflation in 2020? And what will 2021 inflation be like?

Inflation in 2020 was actually much lower than other years. It was only 1.25%. Just to give you perspective, inflation in 2019 was 1.81% and in 2018 it was 2.44%. According to Statista, inflation will be higher this year. Now, that doesn’t mean that it is expected to go up incredibly. The last Statista numbers show 2.26% as the projected rate of inflation for 2021 which compared to the last 10 years average at approximately 1.9%, is just a bit higher and in line with what is expected until 2026. The expected average inflation rates will be around those numbers the next 5 years.

Is inflation good or bad?

Inflation has had a bad reputation over the years. However, it’s not always bad. It can be positive when it helps boost consumer demand and consumption driving economic growth. One way in which inflation can affect an industry is for example when anticipated inflation hurts lenders. However, in these cases, it will help the borrower because the money they pay back is worth less than the money they borrowed. The question for many will be, who wins with inflation? Aside from debtors or borrowers, investors can also benefit if they hold assets in the right markets. Some companies will raise the prices of their products as well when inflation rises the demand for their goods. Inflation can actually provide businesses with pricing power and increase their profit margins if managed the right way.

What will inflation mean in 2021?

The pickup in the inflation rate in 2021 is due to temporary factors which according to Kiplinger should not prompt the Federal Reserve to raise short-term interest rates to bring it down. We may see a rise in the price of groceries, but it should be a moderate one. Another trend we might see is lower medical costs. One of the consequences of the pandemic was lower increases in rent due to legislations to protect the renter in a critical state. However, this might start going back up. Want to know what it might mean for you or have more questions? Contact our team of Financial Advisers at: +1 787-238-6525 and info@lyonbern.com at Lyon Bern We have offices in Puerto Rico and Florida. Contact our team to schedule a digital or in-person meeting.