Looking Closer at Inflation

It is probably safe to say, most of us have heard the world “inflation” being passed around. There has been some concern for investors and questions about the pressures inflation brings upon on our economic growth and the increasing prices of goods and services. Inflationary effects can devalue our cash and investments, so although maybe not so riveting of a topic to the average person, inflation is an important topic for investors to be aware of. You may need to think about what the potential impacts and outcomes may be, if any strategic changes need to be made, and most importantly how it may affect you and your situation specifically.

What really is inflation and how does it work?

Inflation is a metric that analyzes at the fall in value of a currency, which directly effects the cost of goods and services. Inflation, over a designated period of time, measures a comparison in the average cost of goods and services. To the average consumer, it’s all about purchasing power! You may have also heard of CPI, it is commonly used to report inflation figures. The most obvious effect of inflation that effects everyone, but in unique ways, is in the loss of purchasing power over time.

What are the types & causes of inflation?

Demand-pull inflation - when the demand in an economy strongly outweighs the supply, prices go up. This is the most common cause of inflation.

Cost-push inflation - when higher costs of production can decrease the supply (the amount of total production) in the economy.

Built-in inflation - this can contribute to an increase in both the demand and supply side. It also can be seen as workers demanding higher wages to keep up with rising living costs. This in turn causes businesses to raise their prices in order to offset their rising wage costs, leading to a self-reinforcing loop of wage and price increases.

How does inflation affect investing and assets?

This question could be discussed in an entire blog in itself! Main considerations? In a high inflationary environment, your money will purchase less goods and services than it did in the past. We can also see uncertainty in the economy and that can translate into the performance of the stock market. Central banks can raise interest rates in an effort to help curb inflation, but they only have so much control. By raising interest rates, it can negatively impact the value of some investments. The impact inflation has on investing and across different assets, depends on the specific nature of the investment or asset itself. This meaning portfolio diversification can be critical. Being properly diversified for your specific situation could help to prepare against the potential impacts of inflation.

What do I do about it?

Inflation brings about an opportunity for investors to consider where they are invested and why. This can include reviewing your overall portfolio, evaluating your personal vulnerability to inflationary effects, and assessing options out there that could protect downside risk and optimize returns if it makes sense. Portfolio diversification is a pillar to investing, and specifically important during inflationary periods!

You may have debated reviewing your investments or developing a financial strategy. Inflation may be that extra wake up call you need to make sure you are reviewing your portfolio and investments on at least a semi-annual basis. Check in with your team of advisors to ask the questions that may be floating around about how inflation may be affecting you beyond swiping your card at the grocery store. Make sure your current risk profile and investment positioning still makes sense with your specific financial goals.

Conclusion

The point is not to panic at the word “inflation”, but also to not sit around and sit on cash to wait for it to slow because that can be critical for long-term success. Make sure if you want to be in a position of chasing returns to beat inflation, you have a proactive approach of reviewing your current positioning and how that coincides to your current goals. Look at diversification and your exposure to risk!

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.