The mainstream media loves to dwell on our current inflation problem…
But these so-called experts fail to help us understand the math behind solving it.
Folks, the federal government just released the July update for the Consumer Price Index (“CPI”) yesterday. It was up 8.5% year over year, slightly lower than the 9.1% in June.
Based on that, the media would lead you to believe that earning at least 8.6% on your money will beat inflation. After all, that’s a higher return than the CPI increase.
But the thing is… that’s wrong.
In reality, the average American needs to earn more than 11% on their money just to match inflation in a taxable account.
Seriously.
A fancy definition doesn’t exist for what I’m talking about. But I came up with the “Taxable Equivalent Inflation Return.” That’s what you need to actually beat inflation.
Today, I want to share why this return is so important to investors…
Inflation is the “hidden tax.” And it seeps into nearly every corner of the supply chain.
Fuel is the classic example…
American consumerism depends on diesel trucks. And while fuel prices have softened a little bit in recent weeks, they’re still high…
Highway diesel costs $5.10 per gallon today. That’s up about 50% over the past year.
That means moving products around the country is expensive right now. And in turn, everything we buy from the store costs more as well.
The prices of commodities like steel, copper, lumber, chemicals, and plastics are up, too. And as the prices of these materials go up, so do the prices of the end products.
That all makes sense. It’s simple to understand the process of rising inflation – especially since we’re living through it right now.
But as investors, the real problem for us is beating inflation…
As we learned, inflation is at 8.5%. So you might think that’s the hurdle to clear. Unfortunately, it’s much higher…
To keep pace with inflation, you need to account for an after-tax return.
Now, I’m not a tax professional. But the raw math of the problem is simple…
First, you need to define your tax rate, not the bracket. The tax rate is what you end up paying after all your deductions.
Let’s say your tax rate is 25%. (Keep in mind that Uncle Sam generally taxes short-term capital gains at your ordinary income rate. And he typically taxes long-term gains at a flat 15%.)
Convert that percentage to a number (0.25) and subtract it from the number 1. That equals 0.75 (or 75%).
Next, take the target return – in this case, the current inflation rate of 8.5% – and divide that by 0.75. You should get 11.33%.
In other words… many Americans need to earn more than 11% just to break even in today’s economy.
That’s what I call your Taxable Equivalent Inflation Return. And as you can see, it’s an incredibly high bar to clear.
So where can you get 11.33% returns on your money just to match inflation?
The answer is the same today as it was 40 years ago… the stock market.
Despite the downturn so far this year, stocks are still your best hedge against inflation. And now, more than ever, you need a market strategy capable of producing strong returns.
Remember, anything less than 11.33% means you’re paying the hidden tax. And that’s on top of all the goods and services that you’re already paying more to buy.
For my edge, I turn to the Power Gauge. Our one-of-a-kind system helps everyday investors like us uncover the “best of the best” opportunities in the market at any time.
But no matter what tools you use, make sure you don’t pay this hidden tax in your portfolio.
Good investing,
Pete Carmasino
