How is the current market & economic environment effecting working-class people? What can they do to prepare for what might come next?

By Roshan Pourghasemi

Abstract

Fully understanding the current economic environment and market conditions is challenging even for people who have dedicated their life to this subject. Still, it is important to know a little bit about what’s going on since it can change your investment strategy. With the war in Ukraine and the recent pandemic, inflation has seen a sharp spike throughout the world. To stay ahead of the conditions, changing your budget and looking into different securities are some steps you could take. These are some of the steps mentioned in this article, along with more in-depth analysis.

How is the current market & economic environment affecting working-class people? What can they do to prepare for what might come next?

News outlets love to talk about buzzwords and phrases like inflation, interest rate spikes, and supply chains, but they forget to mention how they affect everyday working-class people. Still, in order to reach financial independence, we must look at our budget through the lens of the current economic environment, and this article will serve as a guide to just that.

TL;DR

Following the ramifications of the war in Ukraine and the ongoing COVID-19 pandemic around the world, inflation in the United States has been reaching record highs. In order to combat this, the Federal Reserve has continuously increased interest rates. As working-class people, we can feel powerless at times to the situation around us, but there are ways for us to combat this. Some steps you could take would be adjusting your budget to account for rising food and energy prices, opening a high yield savings account, and investing in assets that do well after inflation, such as bonds. See our article for budgeting, or Nerd Wallet’s articles on the best high yield savings accounts and how to purchase bonds.

Geopolitics - Soaring Wheat Prices

2022 has been an unprecedented year in many regards, the war in Ukraine being one of them. While the most important consequence of the war is the loss of human life and destruction of Ukrainian territory, the economic impact cannot be ignored. Ukraine and Russia account for about a third of the world’s wheat production, a quarter of the barley production, and 75% of the sunflower oil supply. Wheat and barley are used in the production of a plethora of food, such as cookies and pasta, and a byproduct of sunflower oil production is the seed meal farmers use to raise their livestock. We’ve gotten to a point where it is all but inevitable that supply routes must change in order to avoid worldwide famine. This article does a great job expanding on possible changes to the supply chain. Furthermore, Russian oil accounts for about 10% of the global supply. As sanctions rip through Russia’s economy and Russian blocades stop Ukrainian exporters from shipping their goods out into the world, the price of these commodities increases.

What does this mean for you, me, and other working-class Americans? For starters, we have to account for these steep price increases in our budgets. From bread to beer, most products we find in our local grocery stores have these goods involved in at least one step of their production. To that end, grain prices increasing will mean much of the food in grocery stores will get more expensive. For example, the price of Tyson Chicken has increased by 16% since last quarter. This article shows the price increases for other food groups. In order to combat this, we must change our budget to account for the quick increase in food costs.

This sample grocery list shows changes in price from the same month last year:

These numbers are arbitrary, but adjust them based on your and your family’s situation to calculate a new monthly grocery budget. If you need help creating a budget, read our article here.

COVID - The Event of the Century

Everyday it seems like a new effect of the COVID-19 pandemic rears its ugly head. Recent lockdowns and spikes in factory disruptions related to COVID in China means that we aren’t fully out of the water yet. The industrial output of the world’s second largest economy continues to slow down, the effects of which trickle down to affect countries around the world. Car makers around the world aren’t able to get back to pre-pandemic production levels and building projects in the US are being held up by delayed materials. Even more, as we seep back into normalcy, the increase in demand also doesn’t do the supply chain any favors. While the increase in economic activity is good for businesses and workers, it also presents challenges for industries that are slowly recovering from the pandemic, like restaurants and hotels, and businesses that have had less of their product in inventory. This in turn makes businesses with complex supply chains susceptible, as they rely on inputs from other businesses. This article further describes the disruptions and how they have adjusted in the past. As for COVID relief packages like the stimulus checks, many disagree on what their long term effects will be. Critics point to them as a leading factor in the recent spike in inflation, while supporters argue that claim lacks some validity. Feel free to read the two articles linked here and here to see some opinions. In the next section, we will discuss inflation and things working-class people can do to counteract it.

Inflation and the Fed - News Outlets’ Favorite Headlines

The United States’ annual inflation rate for the month of June 2022 was 9.1%, the largest inflation rate we have seen since November of 1981. This number is the Consumer Price Index (CPI), which is calculated by taking the prices of typical consumer goods and measuring their increase from this time last year.

In response to the rising inflation rate, the Federal Reserve has issued new monetary policy in hopes of slowing down the economy. In both June and July, the Federal Reserve raised interest rates by 75 basis points (0.75%), the highest since 1994 in hopes of slowing the inflation rate. By raising interest rates, consumers are disincentivized to take out loans. This slows down sectors like real estate and the car market as many consumers must take out loans in order to be able to complete large purchases, in turn slowing down the economy. Companies also feel the interest rate hikes, as they are some of the largest borrowers. They use credit for a large portion of their spending and pay back debt once they sell their products. When interest rates increase, companies borrow and sell less. However, this halts the growth of companies, and that can trickle down to working families in the form of layoffs, stricter hiring standards, and suffering 401ks, reducing the demand for goods and combating inflation.

As far as the rising interest rates go, the first thing to do would be to get rid of obligatory debt on things that have a variable rate. Most mortgages and auto loans are at a fixed interest rate, but a credit card, for example, is susceptible to increasing interest rates, so it is important to work toward paying off that debt first.

For savers, increasing interest rates can be seen as a positive. The interest on savings accounts at some of the top retail banks has increased to 0.10% on average, with some higher yield savings accounts found online to have an interest rate of 1.75% - 2%. Take a look at Nerd Wallet’s ranking of high yield savings accounts to see which is best for you. Even more, as financing is more expensive when interest rates are higher, saving money will help soften the blow if a larger purchase is necessary, as you will need to borrow less or could even make the purchase outright. Read our article here on more about emergency funds. Investors can also think about buying bonds. Bonds should be purchased when interest rates are relatively high, as bonds become more valuable as interest rates decrease. However, if inflation does not slow down, the Federal Reserve may increase interest rates once again, making bonds bought before less attractive. See Nerd Wallet’s step-by-step guide to buying bonds for more information.

What Steps you Should Take Right Now

• Adjust your budget to account for inflation rates

• Pay off high/variable-interest rate debt

• Reexamine your investment strategy now that bonds are more attractive and the growth of companies are inhibited by rate hikes