It seems like you can’t read an economic briefing today without seeing headlines about inflation. There are many confounding views and in this newsletter we’re going to clarify the major points you need to know.
CPI and what it means
The CPI, or Consumer Price Index, is a measure of inflationary pressure. It tracks the average change in prices in a representative basket of commodities and services purchased by consumers. In July 2021, the CPI rose by 0.5%; it is up 5.4% from twelve months ago.
This data is collected over the telephone and online as in person collection is problematic during the pandemic. These indices are fixed in terms of the goods and how they are weighted, but they are adjusted every two years.
Is it temporary?
Supply disruptions have caused increases in price for items ranging from cat food to semiconductors. Are you seeing price increases in any of the goods you usually buy?
While it’s clear there’s been a spike in inflation, it’s unclear as to whether or not it’s here to stay. As consumption levels were low during 2020, year on year comparisons show a substantial increase in prices versus year ago levels.
It is more than likely that these increases are transient, and will abate once supply factors normalize. However, it is a question of when they will normalize. Future stimulus initiatives will be supportive of demand. If handed out while supply shocks persist, they will only add fuel to the fire.
Likely impact on the market
While nobody can predict what the market will do, there are some general trends that tend to hold during inflationary periods.
Value stocks tend to tolerate an inflationary environment better than growth stocks, which tend to be more impacted. Value stocks are those considered to be trading lower than their fundamental metrics would predict, while growth stocks are companies with the potential for high future growth. However, in general, inflation tends to increase expenses for companies, and thus hurts profits, both of which are negative for the stock market.
As for the bond market, inflation causes yields to rise at all maturities. This is because inflation makes each coupon payment go less far. Thurs, investors demand higher yields to put more cash in their pocket in the form of bigger coupons. As yields and prices move inversely, bond prices may dip if this occurs.
What you should do
Trying to predict the vagaries of the economy is a tall order and one that few are able to do correctly with consistency. As financial decisions are highly personal, any adjustments should be considered on a case by case basis.
If you have questions about how to preserve your portfolio during times of inflation or any other economic changes that may come along, please contact me to talk.
U.S. Bureau of Labor Statistics. Consumer Price Index. Retrieved on August 11th, 2021 from https://www.bls.gov/cpi/
U.S. Bureau of Labor Statistics. Effects of COVID-19 Pandemic and Response on the Consumer Price Index. Retrieved from https://www.bls.gov/covid19/effects-of-covid-19-pandemic-on-consumer-price-index.htm
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Wealthcare Advisory Partners LLC, a registered investment advisor. Wealthcare Advisory Partners, LLC and Prudent Financial, LLC are separate entities from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. No strategy assures success or protects against loss.