March 16, 2024 | CPI, PPI, 401k, Bitcoin Peaking Point and Tax Brackets vs Your Tax Rate

Smart Investing with Brent & Chase Wilsey

CPI

The Consumer Price Index (CPI) came in a little bit hotter than expected as the headline number for February showed an annual increase of 3.2% versus on expectation of 3.1% and the core CPI showed an annual increase of 3.8% versus an expectation of 3.7%. While it was not much progress, there was still a decline from last month’s core CPI reading of 3.9%. This marked the lowest reading since May 2021 when core CPI was 3.8%. Food was a bright spot in the report as the annual increase was just 2.2%. Food at home came in at an annual increase of 1.0%, while food away from home increased 4.5%. With wage pressures continuing, I believe this discrepancy will continue. Energy was also an interesting sector as the annual reading showed a decline of 1.9%, but the monthly reading was up 2.3%. Energy has been a big positive for the headline number, but as we lap easier levels it will likely not be as big of a benefit. One of the areas that remains very hot is motor vehicle insurance as it was up 20.6% compared to last year. I believe this item will remain hot for the next several months, but as we lap higher prices it should subdue. Shelter also remained a large weight on the report as it increased 5.7% over the last year and accounted for about two-thirds of the annual increase in core CPI. I feel like I sound like a broken record, but I continue to believe that this is heavily distorting the numbers and is it declines over the remainder of the year it should be a benefit to both headline and core CPI. I don’t believe this report does anything to change the expectation for three cuts in the back half of the year.

PPI

I was somewhat surprised to see the negative reaction to the February Producer Price Index (PPI). It seems as if people were fixated on the monthly jump of 0.6%, which doubled both the estimate and January’s reading of 0.3%. Looking year-over-year though the numbers still look quite manageable. The headline number increased just 1.6% and core PPI, which excludes food and energy was up 2%. I don’t think this report should have a major impact on the Fed’s expected interest rate direction.

401k

It's no secret that I'm a big advocate of saving in your 401k, but I was surprised to see that according to a recent survey 77% workers believe that the unavailability of pensions is making it harder to achieve the American dream and 83% say all workers should have a pension to be independent and self-reliant in retirement. I was also surprised to see some UAW members are still unsatisfied with the automaker’s retirement plans as some are continuing to push for pensions. A Ford spokesperson recently shared the current retirement structure at their company, "The company contributes 10% of employee base wages, plus $1 per hour worked (capped at 2,080 hours a year), with zero employee contribution required.” I would take that over a defined benefit plan any day. 401ks give participants the power to grow their wealth more effectively, they are much better estate planning tools, and they are much more portable if changing employers. The key is you have to take accountability and actually participate in your 401k to reap the benefits.

Bitcoin Peaking Point

I admit it myself that I have no idea where bitcoin will peak. But the truth is, no one does. I do know that demand is high right now because Wall Street continues to build their ETF’s to collect their fees, which I have talked about before. But can we please get off some of the comparisons of Bitcoin to make one feel better, especially the one with gold and saying it is a digital gold. The value of all mined gold is around $15 trillion. A good portion of that is in gold jewelry. I know when I buy a gift for my wife like a gold bracelet or necklace, she’s going to be pretty happy, but I can’t even write the words how to compare if I gave her a gift somehow of a Bitcoin that she can open and do something with it. I think if I would try, I could be sleeping on the sofa that night. Also, let’s stop saying this will be the replacement currency if the dollar falls. Just think of the calamity the country would go through with a fall of the dollar in the United States. Do you think you will still be able to plug into the Internet and access your Bitcoin? You may not even have electricity to plug-in your electronic devices like phones, computers and laptops? Let’s really understand what Bitcoin is, it is a speculative game that is being played right now, and it really cannot be used for anything that is really of any value. There are smart economists like David Kelly from JPMorgan who have similar feelings. He recently told Barron’s, “I worry about the silly decisions investors make. People get misled by all sorts of fads and fantasies as to how they should invest. I worry about the money that’s been poured into things like Bitcoin, which is absolute nonsense. It is simply a focus of speculation. I worry that someday that’ll all go poof and people will lose money.” I’ve said it before, but congratulations if you have made money on Bitcoin, if you want to continue to hold it you should really think through what it is. If you don’t have a sound answer, you should sell it.

Tax Brackets vs Your Tax Rate

Most people believe tax rates are going up, which may be true. With the level of government spending and debt, it is logical to conclude taxes will need to increase to keep up. Starting in 2026, the federal tax brackets are set to increase due to the sunset of the current tax rates implemented in 2018. We may also see further tax increases to address issues like the deficit or Social Security. However, there is a difference between the tax brackets and the tax rate you will experience as an individual. Just because tax rates increase, doesn’t necessarily mean the rate you will be subject to will be higher or that your tax bill will be higher. Currently the federal tax rates are 10%, 12%, 22%, 24%, 32%, 35%, 37%, and they are expected to change to 10%, 15%, 25%, 28%, 33%, 35%, 39.6%, which is technically an increase. These are brackets which means the more income you have, the higher you get pushed into the brackets. What most people don’t understand is that your individual level of income will also fluctuate up and down over time, not just the tax brackets. In retirement you have much more flexibility in choosing where your income comes from, so while you’re working you might find yourself in the 4th tax bracket which is 24%, but in retirement with the right planning you may get to the 2nd tax bracket which could be 15% at that time. Even though tax rates increased, your tax rate could go down because you will be in a lower bracket due to your income level. I’m not saying taxes aren’t a problem in retirement, because they absolutely can be, but the way to address them is to understand how your individual income will change over time so you can take advantage of the tax system all along the way.