Let’s Talk About Inflation and Your Investment Strategy

Inflation Web

If you’ve been paying even a little attention to the national news and the financial markets over the last six months or so, you’ve probably heard talk about the potential for rising inflation and what it could mean to the economy and the consumer. If you’re also like the average consumer or investor, you may not be fully aware of what inflation is and the effect it can have on your investments and retirement planning. So let’s take a high-level view of what inflation is, how it affects you and what factors are driving the rise in inflation we are seeing recently.

In the simplest terms, inflation is the increase in the price of products over time. You have probably noticed over the years the increase in cost for a postage stamp, a gallon of gas or a gallon of milk at the grocery store. This is inflation. Historically the average rate of inflation has been right around 3% per year, with some years being higher than this and other years where it is barely even noticeable. However, at 3% per year the cost of goods will double about every 22 years.

Investing To Outpace Inflation

This means that as a long term investor, your investments need to have the potential to keep up with and ideally outpace the rate of inflation over time. Many conservative investors feel comfortable investing in CD’s at the bank or other cash alternatives because they feel safe and some are FDIC insured. However if you do the math, historically after taxes and inflation, the real return on your investment in CD’s is negative. And while CD’s and cash alternatives can be a useful investment for an emergency fund or short term goals, they should not be looked at as a long-term investment strategy because historically they do not keep up with the rate of inflation which ultimately means the loss of purchasing power.

While there is no guarantee of future returns, stocks have historically provided higher long-term total returns compared to cash alternatives and bonds. However, the trade-off for higher returns is more risk and volatility and the potential for loss. This is why it is important to think about your time horizon for the money you invest, including when you may need to have access to it as different investments can be more appropriate for different objectives and time frames.

Consumer Price Index (CPU-U)

So what is all this talk about inflation in the news and what are the driving forces behind it? The Consumer Price Index (CPI-U), an index used to monitor inflation, rose by 0.6% in March of this year which was the largest one-month increase we have had since the fall of 2012. This was followed by an increase of 0.8% in April and another 0.6% in May. The increase of CPI-U over the past 12 months has been the highest year-over-year increase since August of 2018. Part of this increase in inflation is due in part to the fact that CPI-U fell in March of 2020 in the middle of the economic shutdown due to the COVID-19 pandemic. So the data could be skewed slightly since we were coming off of lows during the shutdown.

Other reasons for the increase in inflation could be attributed to a significant rise in gasoline prices recently as production companies recovered from interruptions in production due to severe winter weather in Texas. Government stimulus money, healthy savings accounts and pent-up demand for consumer spending could also drive inflation up as the economy continues to reopen and consumers look to spend money they were unable to during the pandemic. Businesses that are reopening may not be able to reopen quickly enough to meet consumer demand, higher costs for materials and labor as well as labor shortages could all be contributing factors to rising inflation.

With that as a backdrop, most economists believe that a rise in inflation in the near term will be temporary and will have little or no long-term consequences. Keep in mind that inflation has been unusually low following the Great Recession that ended in 2009. However there is the possibility that higher inflation could stick around longer and create other consequences. In any scenario, it’s realistic to expect higher prices for certain items as the economy continues to reopen. Things like gasoline, jet fuel and airline tickets which have been depressed during the shutdown caused by the pandemic are starting to increase yet still remain below pre-pandemic levels. Keeping perspective through this is key and remembering that some inflation is good and the sign of a healthy, growing economy.

We continue to monitor the markets and the economy with a holistic, long-term approach and remain optimistic in the near term. If you’d like to have a conversation about this topic or would like to discuss an investment strategy designed to meet your long-term goals, give Morey & Quinn Wealth Partners a call at 402-502-9900 or visit us at www.moreyandquinn.com.


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By Michael Morey, Financial Advisor, RJFS
Registered Principal
Branch Manager

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Morey & Quinn Wealth Partners

Phone: 402.502.9900
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Omaha, NE 68154

Any opinions are those of Michael Morey and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

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