This morning you probably woke up, went through your morning routine, and came to work not expecting anything extraordinary. But something happened that’s good news for all.
The Consumer Price Index (CPI) went down to 4.9% in April.
Why is this so significant? Because in every economic downturn we’ve had this century, the Fed was always forced to raise interest rates until their rate was higher than the rate of inflation.
With the Fed Funds Rate at 5% to 5.25%, that actually happened this morning. It’s now quite possible that the interest rate hikes will end.
Does this mean that it’s over? Are we completely out of the woods? Will the economy have a soft landing and not go into a dreaded recession?
Your guess is as good as any. If I had a crystal ball, I wouldn’t be sitting here doing tax returns.
But it should be noted that this morning’s news is a major step in the right direction.
History shows us that the American Economy is like an eight hundred pound gorilla. It takes an enormous amount of force for it to change directions.
It took a lot for inflation to begin moving down again. Will the Fed still be forced to further increase interest rates? Maybe. Maybe not. But now that their interest rate is above the rate of inflation, we’re certainly near the end of it.
We have a long way to go before inflation is back to an acceptable level of 2% or 3%, and we’re all praying for a soft landing rather than a recession.
Only time will tell.
Let me leave you with this.
What this means to entrepreneurs is that since the inflation rates began going out of control in February of 2020, we’ve lost 17.27% of our buying power. That’s a staggering number, and we aren’t done with this mess yet.
It should be noted that this is based on national averages. Your individual numbers will certainly vary.
We aren’t done with this nightmare, not by a long shot.
1 – Be vigilant. Watch your numbers like a hawk. Don’t be afraid to raise your prices if necessary.
The prices of our inputs have increased significantly over the past couple of years. If we don’t manage our margins, our profits will dry up.
2 – Trim the fat. The labor markets haven’t completely turned yet, but it’s much easier to find qualified people today than it was a year ago. If you’re holding onto some people because you’re worried about needing to replace them when things get better, I wouldn’t give that much thought.
It’s hard to find good people in any economy, but certainly easier now. With the threat of a recession looming, I’d think about my near term problems first, before wasting money on the longer term issues.
3 – Cash is King. If the economy recesses, you’re going to have cash flow problems. No matter what you do, it will happen.
Sitting on as much cash as possible when going into these nightmares is a necessity. Lending always dries up in the middle of these things. Be conservative.
On a lighter note, ChatGPT, the AI software taking the world by storm, recently took all four sections of the CPA exam failing miserably with an average score of 42%. A passing grade is 75% or greater.
Regulation, the section of the exam that includes taxation questions, was one of the portions where it did the worst with a grade of 39%. Human students normally pass the entire exam with a grade in excess of 75% at a rate just below half of those who take the exam.
So much for technology taking any job that requires conscious thought. And I was going to spend next tax season on a boat bouncing around the Caribbean.
I guess I’ll just go back to the grind.
We’re all going to get through this. Let’s get through it together.
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