A Closer Look at Inflation

Have you ever been in an antique shop and seen one of those vintage diner menu signs? 5¢ for a cola, 10¢ for an ice cream, and so on... In comparison to today's prices, it can seem hard to believe that goods were ever so inexpensive, but that's the beauty (and the beast) of inflation.

Odds are, you've noticed an increased number of headlines sounding alarm bells about inflation lately, and while we don't recommend panicking and ducking for cover just yet, we do understand that inflation connotes concern, and we're prepared to address that concern head on.

Measured by the amount of increase in the cost of commonly purchased goods and services, inflation has been running at a relatively low level for the past several years now, finishing 2020 with the Consumer Price Index (CPI) in the 1.4–1.6% range. In April of 2021, on the other hand, the CPI reported the highest year-over-year increase in over a decade of 4.2%. Under normal circumstances, this might be cause for alarm, but then again, there was nothing normal about 2020. 

2020 was an exceptional year, complete with new policy programs, unprecedented spending, and a global pandemic that plunged us all into a time period of uncertainty. Every action triggers a reaction, and so based on said policy programs and spending, it's not entirely surprising that inflation is on the table as one of those potential reactions. On the other hand, relying exclusively on the CPIs findings as a basis upon which to judge the possibility of impending inflation presents an incomplete picture. In reality, there are many factors to consider, such as globalization, population demographics, commodity prices, and technology, just to name a handful.

Additionally, it’s critical to distinguish between transitory and persistent inflation. More often than not, inflation is transitory, based on temporary price hikes that gradually taper off as supply and demand balance each other back out. The current rise in prices likely reflects delays in how the economy's supply chain is adjusting to economic recovery from the pandemic. 

That said, in bottlenecked economies, it is possible for transitory inflation to turn into persistent inflation. And while nobody can say for certain whether current price spikes are transitory or persistent, they can serve as a good reminder to us all to plan for inflation when it comes to investment strategy.

Key factors to consider

When it comes to planning your investment strategy here are a few key considerations to hedge against inflation:

Always aim to generate annual returns that are higher than inflation. As the average interest rate on savings accounts was a lowly 0.06% in early June, investing is imperative to ensure that your money is growing at a higher rate than inflation.
Don't put all your eggs in one basket. Instead, diversify diversify diversify. Inflation is inevitable, but the more broadly diversified your portfolio, the less direct risk you take on. 
Make sure your investments are a mix of stocks and bonds. While stocks have historically had much stronger returns than bonds, they are associated with much higher volatility. On the flip side, bonds are lower risk, but also lower reward.

My promise to you

I understand that uncertainty can be uncomfortable and even a little scary, but history has shown that clients who maintain a well-diversified and flexible portfolio will do well over the long term. While inflation concerns are likely to remain in the spotlight for a while, I urge you to ride them out like you would a roller coaster: perhaps you feel a bit apprehensive while waiting in line, maybe the ride even takes a turn or two that you're uncomfortable with, but once it's over, you'll have the satisfaction of knowing you pulled through. And I'll be right there next to you, full speed ahead. If you have questions or concerns about your portfolio and its level of preparedness, don't hesitate to get in touch.