Investors need to be aware of inflation as it is a powerful, omnipresent force that affects all aspects of the economy from consumer spending, tax policies, interest rates, and business investments. Our financial advisor, Evan Kulak, has provided us with useful information on inflation and how it can impact your investments.
What is Inflation?
Inflation is a sustained rise in the overall price levels of goods and services. It refers to the situation in which it costs more dollars to purchase goods and services than it took in the past to buy the same goods and services. Simply put, inflation means that your money will not buy as much today as it could yesterday.
What Causes Inflation?
Inflation occurs when there is a more rapid increase in the quantity of money than in the quantity of goods and services available for purchase. In other words, the government printing more money leads to higher rates of inflation. Inflation is a printing press phenomenon.
In response to the COVID-19 pandemic, the federal government has enacted six major stimulus bills, pumping 5.3 trillion dollars into the U.S. economy in about a twelve-month time period. The massive amount of stimulus has prompted inflationary concerns from economists and institutional investors. Fears of rising inflation topped the list of investor and policy concerns for 2021.
Current Inflation Indicators
Inflation indicators have been alerting investors to potentially accelerating inflation in 2021.
- The producer price index for final demand jumped 1.0% last month, as costs increased across the board. The PPI rose 0.5% in February. In the 12 months through March, the PPI surged 4.2%. That was the biggest year-on-year rise since September 2011 and followed a 2.8% advance in February.
- Federal Reserve Chair Jerome Powell stated on Sunday: "We feel like we're at a place where the economy's about to start growing much more quickly and job creation coming in much more quickly." The economy is expected to grow much quicker than expected due to significantly better than expected vaccine numbers and fiscal support.
- U.S. consumer prices climbed in March by the most since 2012, adding to evidence of budding inflationary pressures as the economy reopens and demand strengthens. The consumer price index increased 0.6% from the prior month after a 0.4% gain in February, according to Labor Department data Tuesday.
- U.S. Inflation expectations climbed to the highest level since 2008, with 5-year inflation expectations exceeding 2.5%
How We Can Protect From Inflation
Evan recommends investors review their current holdings and consider reallocating portfolios to protect against the threat of rising inflation. To protect and profit from inflation investors can purchase assets that increase in value when inflation increases.
- Treasury Inflation Protected Securities (TIPS): Treasury Inflation Protected Securities, or TIPS, are treasury bonds that provide protection against inflation. The principal of these bonds is contractually linked to inflation meaning interest payments rise with inflation. TIPS can be thought of as an “inflation insurance”.
- Blue Chip Value / High Dividend Stocks: Historically, value and high dividend stocks have done well during inflationary periods as they are able to pass on price increases to their customers.
- Gold / Commodities: Gold and commodities can serve as an excellent counterweight to higher inflation.
Questions about Inflation?
Would you like to learn more about how to protect your savings from inflation? Evan would be happy to discuss the subject with you further. He can also review your current investment plan, how to best allocate your savings, and how inflation might impact your portfolio and goals.
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